You want to use a Stock Trading System?
Which one is the right one for you?
Obviously only one person can decide this: You.
Before I start a Stock Trading System I decide some points
- Which stock
In general, you have 3 main time frame for your trading
- Swing Trading (3 – 14 days)
- Long term trading (more than 14 days)
The definition differs a little bit from person to person, but it gives you a good approximation.
In the following parts I will discuss the advantages and disadvantages of each timeframe.
- One big advantage is the fact that you close all open positions by the end of the day. This is for some people crucial, because they don´t sleep well with open positions overnight even if it is a winning position. Besides the emotional stress there can be a rational reason too. Equity markets tend to open the next day with a gap. This gap can be positive or negative. This means that your profitable position from the end of the day turns into a loser without any possibility to “escape” or quit the trade. This can be a very frustrating experience.
- Another advantage is the smaller loss. Because you close the trade at least at the end of day your loss per trade is on average smaller than on larger time frames. Furthermore your strategy should have a smaller stop loss than strategy which try to catch a longer trend.
- Because you can trade every day you have more opportunities to enter a position. In case you have a good strategy and stick to it, your capital will grow faster.
- The development of a day trading strategy can be easier because your sample data is much bigger than for swing trading or long term trading. Imagine you make every day only one trade and at a swing trading strategy 1 trade every 5 days or less. This means that your need 5 times more data to develop the strategy. For more information at this point, take a look at my free pdf.
- The trading cost becomes a crucial part of your strategy. The shorter the time frame the bigger the impact of slippage and commission to your success. You find more information at my other blog “Low cost stock trading” or my free pdf.
- Another disadvantage is the smaller Average Trade Net Profit compared to a longer time frame. You don´t have the possibility to gain so much profit with one trade, that it compensates a row of losers.
Long term trading
- The long term trading is smoother. This can be emotional a big advantage. On the other hand, I wrote above, that the closed trade every day is also an advantage. What is true? It depends on your emotional capacity and your aim in regard to trading effort. Make every day at least one trade, or make per month one trade or less? Do you like to make every day a decision, or do you like to decide only once per month?
- The trading cost doesn´t really matter. Because you enter one trade per month, you can neglect the trading cost.
- The Average Trade Net Profit is higher, because you follow the big trends. This leads to higher profits and positive outliers.
- Long term trading systems tend to have more losers than winners. This means, that you face a row of losing trades before you get the big shot, which turns all into profit.
- The drawdown per trade has to be higher than for day trading systems, because you aim for the big winner. You have to be able to tolerate the bigger losers.
- Compared to day trading you have less possibilities, because you trade only once a month.
- The strategy cost become a bigger part. Because you have to search for more quality this can be time consuming.
This style is in between. Some people say, that it combines the disadvantages of both other styles. I would disagree.
From my experience swing trading system can be great because they combine the advantages of day trading and long term trading.
When you are looking at the exchange you are overwhelmed by the range of companies that are listed. Obviously appear two main selections for a good trading stock:
The typical beginner has a small trading account. Therefore he is limited by his capital. So if you want to trade Google (Alphabet) which actually is around $ 600 – 700 per share, you may buy a few. But if you want to buy the share from Warren Buffets Company, Berkshire Hathaway, which actually is around $ 200,000 per share, it is impossible for the average investor.
Therefore I look in the price range between $ 10 and 100. The supply of companies is still very board and good.
I pay more attention to the trading volume of a stock. The higher the volume the better, because this leads to less slippage (trading cost!) and I can buy and sell it every time. I don´t have to search for a buyer or seller!
This a crucial point of every trading strategy. Beginners tend to risk to much capital. A rule of thumb is: Do not risk more than 1% of your trading capital for each trade.
I will cover this topic in another blog in more detail.
Many brokers offer a leverage of your trading capital. Should you use it? I suggest yes. But nevertheless do not risk more than 1% of your trading capital!
Should you short a trade? Is it riskier?
From my experience it isn´t riskier than to buy a stock. You get an additional opportunity for trading. Accept this offer. It is free but not risk free!
I hope you found some valuable information in this article.
If you are looking for good trading strategies, take a look at my blog “Best Future Trading System”.
Please feel free to leave a comment below and let me know what you think.