Your Own Stock trading system or copy an existing one?

Should I build my own Stock trading system or copy an existing one?

Every trader who wants to make money and generate trading profits in the stock market needs one. A good strategy can increase the chances of winning because it sets entry points, exit points, and risk management rules. You, therefore, need to spend some time looking for the best strategy.

You can find suitable Systems on the internet. You might be able to come across free systems but many others are sold at good prices. It’s easy to see why expert Systems are costly. They are the tools that can help investors make well beyond the initial cost of a system. Despite the high price tags though, stock trading systems that are for sale are often ideal to use because their cost is a warranty of sorts. You can reasonably expect high system quality that is the result of research.

The mere fact that people buy existing Systems such as the Bollinger or The 50 and 200 Day Moving Average stock trading system implies that there may be an intention to simply copy off a successful method.

The question is whether copying is really a good step to take or not.

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How to Trade Support and Resistance in Stocks

How to Trade Support and Resistance on a stock chart

Trading happens over exchange with various participants punching the orders round the clock. This cumulative activity creates some price zones or levels. Those levels signify something and are used as a reference by many traders. Those levels are called Support and Resistance levels.

The Invisible magic of price action?

You must have felt that a stock sometimes rebounds from a certain price zone or level many times and you wonder what makes it do so? Most of the times stock reverse from a particular price and you again fail to know why this is happening. This is not a magic. These price levels are called as the support and resistance levels.

How are these support and resistance created?

When trading action takes place in a new script. The psychology of the traders helps create those price zones where they feel the stock is either overbought or expensive(Resistance levels), Price at which stock is cheap and oversold( Support level). As the trading involves a large number of traders the probability of what they think is right level is going to be high. Simply, because of the Wisdom of the crowd principle.

After some time of trading activity, that stock develops a price pattern based on the psychology described above. Now, the new traders or investors base their future prediction of price movement based on the historical price pattern they just saw. They Just see left and find out where the price has normally taken reversal. They utilize Technical Analysis to gauge the price action and predict targets. Continue reading “How to Trade Support and Resistance in Stocks”

What is Short Selling?

My ideas about Short Selling and What is Short Selling a stock?

Short selling

 

In trading, shorting stocks is referred to try to profit from falling stocks. From day one in school, you were taught all kinds of wonderful investment strategies such as buy low and sell high or buy higher and sell higher (my strategy).   It sounds very unnatural to profit from falling stocks.   Nevertheless, Shorting is a genius idea.   If you ask me, nothing in the financial world comes close to allowing short selling.   It simply is a splendid idea for speculators like you and me.

This will never happen in any places other than trading. When you buy a piece of real estate and hold onto it for a few years, you sell it for a profit if it has appreciated over the years.   It is all sound and good.   What if you go tell a housing developer to lend you a piece of real estate and sell it at 2017, buy it back in 2019, give him back the real estate and you keep the difference?     He would think you are just out of your mind.  He also must think you are one crook because you profit from his pains.   So in real life, you cannot ask someone to lend you something and short selling it for a profit even if it is a technically sound idea. Continue reading “What is Short Selling?”

My stock selection method

How I select stock for trading?

 I used to spend 30-45 minutes daily on screening stocks to trade next day a few years ago. Until. One day I stumbled upon a wonderful website which provides free charts and technical data. Now my screening time for stock selection has reduced to only 5 minutes maximum.
Icharts has got a good EOD screener which can be used for selecting stocks for investing / trading. This screener shows various metrics like % gain from 1 week to one year, SMA / EMA values and other technical parameters.
Stock selection of strong stocks can be a good idea as it is known that outperformers keep outperforming until they don’t. The % gain in the above screener can be used as your first filter. You can download the screener and then see the % gain in various time frames. Stocks which have gained more than 50% to 75% in one year can be a good filter. Below is a screenshot where the stocks are arranged according to their 1 year % gain:
stock selection guide

Below they are arranged according to their 3 month % gain:

method of stock selection

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Who are options traders?

Who are options traders and what they do?

Many people believe it is risky to become an options traders. This incorrect assumption is prevalent among those who have little understanding of the stock market. The notion that trading options are scary has been perpetuated over the years by general ignorance. The truth is that the stock market is a risky endeavor regardless of what strategy or approach you take; that’s the nature of investing. But being an options traders comes with no additional risk than someone who trades stocks.

It’s just like driving an automobile. The idea of driving a 2,000-pound piece of machinery at speeds of 75 miles per hour does sound daunting, but once a student learns how to properly drive a car it no longer seems as dangerous. The same is true with options; once a student learns the basics, the idea no longer sounds crazy. An options traders know there are potential dangers that are inherent with that style of trading, although there are an equal number of advantages, too.

Among the dangers faced when trading options are:

Time:

Their options trade has a time limit from the moment they enter into the position; an option is good for a specified amount of time before it expires worthless. If the trade doesn’t work in the expected direction, there may not be enough time for the position to come around.

Volatility:

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Day Trading vs. Swing Trading

Day Trading vs. Swing Trading

day trading vs. swing trading

If you are unaware about the day and swing trader, then read this post first.

Day Trading vs. Swing trading is a topic on which every trader thinks over it in his trading career. The Trader is in a dilemma, which one should be chosen. Which one is suitable for you?  Let’s first take a look at each style.  The following is based on the assumption that you follow the idiom cut losers and ride winners

Day Trading

Pros:

  • Very little risk due to not holding positions overnight
  • Easy and quick entries and exits
  • No need to worry about long-term general trends

 

Cons:

  • Much smaller profits than swing trading
  • A very accurate system is required
  • Not good for people who have a day job.

 

Pros 1 and 2 are very easy to understand.

For pro 3, I believe we do not need to worry about the long-term trend of a position that you are day trading because we try to capture small moves for a day position.  If a stock is in a long-term uptrend, the probability that it will retrace at a certain point it is over 99%  since all stocks zig and zag. When it shows any signs of aging, you can fade its intra-day. It is the same when a stock is in a downtrend.

Swing  Trading

Pros:

  1. Bigger profits
  2. No need for a very accurate system
  3. Suitable for everyone,  lawyers, doctors, policemen, you, me and your neighbor

Cons:

  1. More risk due to holding positions overnight
  2. A lot of your positions might die since they require much bigger moves

Pro 1 is true since I always believe that your risk and reward is mathematically proportional.  If you take a bigger risk, you MIGHT have a bigger reward.

Pro 2. I explained in this post (Probability and Risk/Reward Ratio) that you will still make money even if the accuracy of your system is below 50%.