There is no one stock market trading system that is perfect. If there was then everyone would use it and eventually that would be no volatility in the stock market what – so –ever. That doesn’t sound very exciting or profitable. We would all earn the market average because all prices are perfect. Good thing the stock market doesn’t work like that at all. The best stock market trading systems are the ones that work for you. The only way you’ll find the best system is to try lots of them. I recommend you don’t do your testing with real money unless you’re really rich and 1% of your account is a significant amount of money to trade with. There are plenty of proper stock market simulators available.
First here are the stock market trading systems commonly associated with fundamental investing. This tends to work well in your retirement accounts where true stock trading, margin, and shorting are not readily available or legal.
Buy and Hold
Buy and hold isn’t exactly what you think of as stock market trading, but it is still a valid option. Since the start of the market stocks that exceed penny stock status have consistently gone up in virtually every period longer than 5 years. Therefore, if you just hold the stock long enough you will eventually profit. Of course adding fundamentals and technical buy points to your decisions can improve your odds greatly. Also, adding exit strategies (it doesn’t have to be buy and hold forever) can improve returns by taking profits and faster than realistic growth.
Automatic Investing
Automatic investing is a form of investing where you choose an equity or mutual fund and buy when the stock moves down and sell when the stock moves up. You never use all of your cash or sell all of your stock in a single transaction. This allows you to keep taking advantage of the variation to earn you extra profit on your investment. This stock market trading system tends to use economic data to tweak how aggressively you buy and sell or what level of cash reserves you want to hold. Automatic Investment Management was first described by Robert Lichello in the late 70s to create a way to make money in a flat market. I love this style of investing in my 401k where all I can choose is between common asset classes.
Mechanical Investing
Mechanical investing makes me think of PhD mathematicians and super computers working on the perfect algorithm. The mechanical stock market trading systems use different inputs like debt to equity, price, change in price, weather, day of week, moving average, and anything else you can think of to come up with patterns that make good investments. Then all you do is follow the rules no matter what. This is very difficult for most traders because there is no “feel” involved. It has been found that simpler models tend to be more effective. If you put too many inputs into your stock market model you just end up with a false equation that matches the past perfectly with no future predicting power.
True Stock Market Trading Systems
When you are a trader you have to break the mentality of investing. You are not looking to create wealth by owning profit producing machines in the form of shares of a corporation. You are trying to buy a share of stock from one person who doesn’t want it and sell it to someone else for a little profit. Your value in society isn’t as an investor, but by creating a more free market. You produce liquidity. You make the stock seller happy because someone bought his stock and you make the buyer happy because there was a share for sale. Here are some of the common stock trading strategies.
Day Trading
Day trading is an ultra short term mentality. Fundamentals carry virtually no weight unless you’re crossing an major report time like earnings or jobs. You can day trade based on very short term trends or just scalp ultra small movements. All of the following strategies can be used in a day trading fashion except the risk management and time frames are obviously different. You can leverage very heavily with day trading because you are risking very small amounts. You tend to lose more trades with day trading when using swing strategies but the losses are very small compared to the wins. If you are a scalper you must have a very high success ratio due to the small wins.
Swing Trading
As a swing trader you need to learn to recognize the major price points. The market recognizes certain prices as “too low” and others as “too high” which are better known as support and resistance stock market points. You want to trade between these well established areas. When you’re at these points you get out of the stock position and let the bulls and bears duke it out until they are between those prices again. Having a very disciplined plan and a very good understand of chart patterns, cycles, Fibonacci ratios, moving averages, and money management.
Momentum Trading
As a momentum trader you are a market psychologist. You want to understand the mood of the market to determine if you should be buying, shorting, or selling out. The volume of trades, rate of change, and economic indicators are your best friends. Relative Strength indexes and Moving Average Convergence Divergence (MACD) are common secondary indicators for you. You will likely be using “breakouts” over support points to determine entry and exits with special attention paid at the exit to get out before the momentum dies.
In reality all of the stock market trading systems could and should be mixed and matched to suit your style. Each has to be tuned to your skills and stomach so that you can execute, keep up with the information, and sleep at night.
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