Learn The Stock Market And How to Trade

 A stock trading system is simply a series of rules that you follow no matter what your emotions are screaming at you to do.  This type of stock market investing is not for the weak hearted, woozy stomached, or the gambler.   These mechanical investing programs became very popular in the 90s.  I prefer the online stock market trading system simply because I need my computer for all the information crunching anyways.  However, being in constant contact with your online broker will tempt you to fiddle which is definitely bad for any stock trading system.  Let’s start with what I think are the best stock trading systems.

Free Stock Trading Systems

Any stock trading system that you define yourself (or modify cheaply) could be considered a free trading system.  The best trading systems are simple.  If you attempt to use past history to create the “perfect” stock trading system you will end up using 10 plus variables for your system.  This gobbly goo won’t relate to anything for real.  The best systems use two or three metrics that are minimally related to each other.   Here are some good examples of pairings that aren’t related:

• Bond yield, Price to Earnings ratio, and Day of Week
• Relative Strength Index, Return on Assets, and % of cash flow for R&D

These aren’t necessarily effective indicators with each other, just examples of useful information types that could be used with each other.  Here are some bad pairings:

• Return on Assets, Return on Earnings, % Profit Increase
• 50 day moving average cross over, % price increase today

See how these are related to each other.   These have a higher chance of fake outs because the false signal will be shown in both indicators to some degree.  It’s best to have alternative data to verify the claim with independent data.   One example that has bit me in the past is a short term cross over looking good for a short term buy, but I didn’t check the same indicator on a longer term scale that was screaming negative.  While trying to catch a stock market wave I was hit by a tsunami.

Automated Stock Trading Systems

An automated stock trading system is simply a normal trading program with the computer programming to make the trades automatic with the triggers.  If you wish to purchase an automated stock trading system you’ll have to invest a large amount of money to justify the programming, trust someone else’s system, or some hedge funds run under these conditions.  The most famous of them have PhD mathematicians and statisticians on the team developing the system.  Unfortunately, their systems are designed to move large amounts of money because this is how they make their money.  That is not necessarily the best for the average investor.

Related posts:

1. Stock Market Trading Systems
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3. Is Short Selling Good or Bad for the Stock Market?