Trading Method In Stock Market

With the proliferation of computers, trading system development seems to have replaced stamp collecting as the hobby of choice. Trading system development is the area where a lot of traders focus the bulk of their attention. And this is not necessarily a bad thing. Using an unemotional systematic approach to trading can greatly increase your odds of success because it can remove your ego from the day-to-day decision-making process and can reduce your emotional attachment to the money in your trading account.

The beauty of a trading system—which automatically generates buy and sell signals based on some preset objective criteria—is that it doesn’t care what the weather is. It doesn’t care if a big announcement is forthcoming, if the Fed chairman is speaking in 20 minutes nor about the price of tea in China. All it knows is that if a certain set of criteria is met it will say “buy” and if another set of criteria is met it will say “sell.” In essence, it never makes a mistake. This is not to say that it won’t have losing trades. It just means that it always

does what it is suppose to do.

Compare this to the trader who flies by the seat of his pants, buying or selling short based on subjective decision making. He buys and the Stock market goes down; he reverses to short and the stock market rallies. He thinks he should buy but decides to wait. The stock market then explodes higher and he misses the big move, the one which would have made back the losses and amassed a sizable profit. This scenario can happen to a trader using an objective trading system also. However, the difference is in the emotional aftermath.

The system trader may begin to question his system after a particularly bad period of trading, but this is a far easier position to be in than the subjective trader who just made three big mistakes back to back to back. It is hard enough to stomach losses when the stock markets knock you around. It is far more painful when you do it to yourself. Subjective trading involves entering into trading with the idea in the back of your head that when the time is right to enter or exit a trade “I’ll just know.” This approach is fraught with peril. On the other side of the coin, it should be clearly understood that utilizing a purely mechanical trading system in no way guarantees that you will be trade profitably in stock market. What it does mean is that you may be able to drag around a lot less emotional baggage than the subjective trader. A subjective trader who “makes it up as he goes along” will likely have a number of opportunities to “beat himself up” over the bad trades he has made that he shouldn’t have and the great trades that he didn’t take when he had the chance.

Whether you choose to trade systematically, subjectively or somewhere in between there are certain criteria that you need to address in stock market. The more clearly stated and objective your answers to these questions, the greater the likelihood of your long-term success in stock market.