What Is Your Trading System
Stock Trading Systems – The Lexicon
While there is no more a surefire method for picking stocks than there is for picking lottery numbers, there is a reason to have a system when doing stock trading. You need a plan, which gives you metrics and bellweathers for reading charts and trends and measuring how you’re doing against complex goals. Charts are visual representations of stock prices over time, and you can familiarize yourself with them in the financial pages of your local news paper. Think back to algebra, and plotting curves – the vertical axis is the price, and the horizontal axis is time, usually in days or weeks. Make sure, when comparing graphs, that the vertical axis is the same for multiple stocks. Sparkline graphs are a recent innovation and give you an instant visual impact on a wide range of numbers over time.
Charts can be made on an Excel spreadsheet or custom software. Day traders track the prices in hourly and 15 minute increments, focusing on several related stocks in a sector. Long term investors look for patterns and trends on price charts over months and years, looking for cyclical trends, new product rollouts and new information about the management or prospect of the company. Charts that show prices going up show positive momentum, charts with prices declining show negative momentum, and the trick is trying to get the information to understand the trend and make informed decisions.
Stocks have a trading range – the amount of daily or weekly fluctuation a stock’s price undergoes. Stocks moving below their trading range may be good targets for acquisition, while stocks that are rising above their trading range may be a fad purchase. It takes careful consideration of a lot of variables in a chaotic system to figure this out.
Trends are identified when three peaks or three troughs are plotted on the line and linked with a straight line; this can be used to assess the cumulative impact of a lot of factors in the stock trade. There’s money to be made in both upwards and downward trends, and some stock systems look for breaks in the trends for buy and sell targets. Trends are easier to spot and adapt to in long term holding, and require more skill and finesse for day traders. Catching the trend can be an exhilarating ride – and quite lucrative if you’re early on it and know when to bail out.
Analyzing these trends takes a lot of mathematical knowledge, and most of that’s been codified into plotting and trend spotting software, most of which is accessible to investors who aren’t mathematicians with the instincts of sharks. Investors can spend hundreds or thousand on software to develop their stock trading system. Using custom software saves time integrating information to produce charts and archive tracking information.
Smart traders know that a stock trading system is fluid not static. No matter how much they believe in their system, they always look for tweaks and try to catch themselves before investing due to emotional interplay, ego or blind spots. Never buy a stock you haven’t researched or plotted, and always be consistent in applying your system – it’s the only way to realistically tell what’s working and what isn’t, and adjust to the dynamic needs of the market.. All traders have losses – they learn from them. Never trash your stock trading system because of the first loss.