An Introduction To Stock Trading Systems

Oct 19, 09 An Introduction To Stock Trading Systems
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Whether you plan to venture into Forex or domestic stock exchange, trading systems will greatly help you become successful in this endeavor.  However, before proceeding, it is vital to have a fundamental understanding of what they are and how they function.

A stock trade system pertains to specific rules or parameters that determine points of entry and exit, called signals, for a given equity.  They are often indicated on a chart in real time and prompt immediate implementation of a trade.

In the construction of stock market trading system parameters, the most common technical analysis tools consist of moving averages, Bollinger bands, stochastic, relative strength, and oscillators.  Most of the time, a combination of these tools determines a rule.  However, there are also instances wherein only one indicator is used in rule creation. Utilizing a trading system provides several benefits to a Forex or stock market trader.

Benefits of Stock Trading Systems

There are many benefits of using a stock trading system.

Increased Profits.  Coping with losses is one of the most difficult aspects of being a Forex or stock exchange market.  In an effort to recover the money they loss from trading, investors usually make hasty decisions and consequently lose more money in the process.

Since most of these systems are automated, there is no need for the investor to make a decision, as it is the software that determines when to enter and exit trading.  By doing so, losses will be minimized and there is a greater chance for increasing profits.

Time Efficient.  Again, since most stock trading systems are optimized and automated, the trader need not exert much time analyzing and initiating trades.  The system is designed to both generate the signals and perform the actual trade.

Convenient.  Many systems have been developed and are currently being marketed.  However, using the work of other people entails payment.  You need to be careful when choosing a company because many of them are fraudulent or do not perform as promised.

Pitfalls of Trading Systems

While they may have their advantages, a stock market trading system is not perfect and present their own disadvantages.

Complicated.  This is the biggest disadvantage of a trading system.  Creating a trading system requires solid technical ability, an ability to decide empirically, and a comprehensive understanding of the functions of parameters.  Even if you can avoid becoming bogged down in the technical details, familiarizing yourself with the parameters can be equally challenging.

Unrealistic Expectations.  In order for a system to become effective, you need to have knowledge of how to differentiate simulated from actual results.  This is known as “slippage” and represents one of the major pitfalls in the effectiveness of a system.

Development Takes Time.  The task of developing your own system is time consuming.  Getting it to run and work effectively, as well as testing it, may take some time.  Not to mention the fact that you have to perform a paper trade in real time in order to make sure that your system is reliable.  Slippage may require you to completely revise your system.

As mentioned above, you need to be careful when choosing a system.  There are firms that are out to get your money in exchange for a system that does not work.  Ultimately, a stock trading system can be an effective tool for novice traders who want to succeed and make a living investing.

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2 Comments

  1. Identifying trends in the stock market is also part of the stock market trading tips that you should learn. You should be familiar with the movements of stocks in the market through stock indexes like the Dow Jones. You should also know how different economic factors like interest rates and inflation rates affect your investments in stock trading.

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