A trading system is a set of rules that govern buy and sell decisions of stock trading. Historically, all trading has been done by people who are experts at stock markets. But now that vast amount of knowledge is available at your fingertips, people with little or no experience in the stock market can also trade. By automating the buy and sell rules, trading becomes free of any mistakes committed due to human emotions. People generally take wrong decisions when they are faced with fear or greed. This results into less profits or huge losses. By having a system in place that would take decisions of buying and selling based on predefined parameters makes stock trading more scientific and less intuitional.
Rules governing trading system
A trading system is developed by incorporating some parameters. Some of known rules or parameters that are used to make a trading system are:
- Moving averages
Moving averages are used in technical analysis and they are a trend following indicator.
Oscillators as the name suggests indicate the momentum of prices. They take the closing price and see how close it is to the day’s high or low price thus they establish a trend or momentum of the stock. There are many oscillators some of which are stochastic oscillator, MFI-Money flow index, RSI-Relative strength index and ROC-Rate of change.
- Bollinger bands
It is a popular trading analysis concept by a trader John Bollinger. He uses two bands, upper and lower that are plotted away from the moving average. The bands use standard deviation calculation.
Types of Trading Systems
- Trend following trading system
This system follows a particular price trend and makes buying and selling decision accordingly. It bases its decisions more on market conditions rather than on the stock profile.
- Counter trend trading system
This trading system is based on the objective of buying at the lowest prices and selling at the highest prices. It is opposite to the trend following system. Traders generally trade as per these two trading styles only. Either they follow the trend or go against it.
- Breakouts trading system
In this trading system traders enter the market when prices cross a particular thresh hold level. Traders use the Bollinger band technical analysis while trading according to this system.
- Moving average trading system
Moving average is most simple of all trading systems. The entry and exit point is decided based upon the point when the prices cross the moving average, whether below or above it.
Choosing a trading system
A trading system is quite complex and requires considerable amount of effort and time to make one.More and more people are choosing them because of the various advantages they offer. They are easy to operate, save time and limit emotions in any decision. Before choosing a trading system you need to make sure that it provides reasonable guarantees and not outrageous ones. You would also gain by testing the system first before buying them. Be aware of any scams floating around in the market andensure that the system has been thoroughly tested to mitigate any losses.