Choosing Stock Trading Systems

To find the right stock trading systems for your trading plan, we should look at the historical performance of the systems, remember the 3 phase of market trends that we have talked about:

Up trending
Down trending
Consolidating

Stock trading systems should have gone through these 3 phases to be certain to perform well. Sometime system sellers will scan the database with their system criteria and pick the most profitable period to advertise. So do ask for history of the trending period that most concern you, you'll be surprise some of them will disappear after a few email.

Some system sellers will let you try their system free for a short period of time, these would be the best choice. This could help you to find out the compatibility of the system with your trading style and the actual timing of execution of trade in real time - that is very important because the past history cannot tell you the exact moment that execute the trade which makes a big difference in volatile market with slippage.

How many years of trading history do you need?
If the performance history has gone through the 3 trending phases would probably be sufficient. A short term trend can happen in a few month using daily data but it could last for a year or longer, so bring up the charts of that period and identify the 3 phases. Also try to find out in which phase does the system perform the best.

How often does the stock trading system generate a signal?
The more buying or selling signals the trading systems generate the more will be the transaction cost and will use more of your psychological capital, so do take that into account to weight between the quality (accuracy) and quantity of trading signals.

Highly volatile markets tends to generate more signal than a normal market, the trick to trade this market is in the money management skill. You have to lower your risking percentage of capital to usually 1% to 2%, depends on the instruments. But the main concern in trading this type of market is the mental fluctuation in extreme market movement. Once you lost your psychological money, the real money will follow.

What do you need to know about your mentality before trading with stock trading system?
Traders just like anyone in the world, they can come from different countries, cultures and bought up in different families. Hence traders have different psychological, attitude and personality traits. In fact many traders are either over-trade in the long side and under-trade the short side or over-trade the short side and under-trade the long side. Have a look at your trading record to find out which type of trader are you. So you can understand why people trade differently and there is no right or wrong trade in this aspect of trading.

One thing that I learnt in trading is never tell others about your market view of your current position because once you tell someone about your view and reason, you would unconsciously biased towards your “view and reason”.

Does stock trading system perform differently in different market?
Yes, trading systems in trending, consolidating and jerky markets are all react and perform differently according to the market.

> Trending market

These type of stock trading systems are the hardest to trade psychologically because you will trade against the norm. You are going to let the profit run. You will trade against “take some profit” “keep some profit when it’s still there”. You may not have a price objective for exit but only stop order. Therefore you are trading against your fear and the system would help to let your greed goes on with the right reason. When trend trading systems goes through consolidation or jerky move. It is not going to produce that many profitable trades and strict money management would be needed to protect your capital.

> Consolidate market

Consolidate or sideway trading systems trade market resistance and support levels, sort of picking the tops and bottoms. The problems with these systems are trading very short term overbought and oversold market, sometimes would over trade, taking only small profits or reaching the price objective too early and exit from the market then watch the trend keep going.

> Jerky and volatile market

Jerky and volatile market systems trade breakouts and gaps in short term with price objective in certain percentage or in number of days. In general these systems would products less trade than the other two systems. Beware! There are plenty of traps in this type of trades; many times a breakout turns out to be false break and usually lose in these trades tend to be larger than the other trading systems.

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