In today's technologically-driven marketplace, it's easy to find thousands of Web sites touting the latest and greatest trading systems for you to use. As with any product, one must be aware of the consequences that accompany different trading systems, and must act responsibly when deciding which trading system, if any, is right for him or her.
Remember: if it sounds too good to be true, it usually is!
What Is A Trading System?
Before deciding to investigate different trading systems, it’s a good idea to know what the definition of a trading system is, and what categories different trading systems fall into. While this sounds simple enough, the technology behind trading systems is far more complex than the average investor would be able to create or duplicate on his or her own.
Computer-based trading systems are based on algorithms created using technical analysis of the markets. Different trading systems may use algorithms based on moving averages, support and resistance prices, overall long-term trends and relative strength, as well as other specific criteria selected by the trading system creator. The algorithms then produce “rules” to be utilized when deciding whether to enter or exit a trade. If the security in question meets the criteria of the rule, the user should consider executing the trade.
Some trading systems have become automated and computer-based, automatically entering and exiting trades via a broker/dealer when the criteria of the different rules you chose are met. Typically, automated trading systems execute trades based on multi-faceted combinations of rules. However, it’s best to have a basic knowledge of what you’re getting into before you start using one of these trading systems to help you trade your account.
There are many things to review when considering using a trading system.
Some of the positive aspects of trading systems include:
- It can save time. Once you have established an effective system, little to no effort is required by the trader. Often, trading systems are integrated with a brokerage firm, so the trader can spend less time on analysis.
- It takes the emotion out of your trading. Emotion is often a major catalyst in the failure of a trader. Traders are often influenced by fear or greed, exiting a profitable position too early, or holding on to a bad position for too long. Using trading systems allows traders to control those emotions. Trading can become mechanical once the trader sets up his or her rules because it is automated. By cutting down on human inefficiencies and emotions, using trading systems can increase profits.
- It's cheaper than hiring a financial advisor. Do you want another person making your trading decisions for you? Some companies’ trading systems are available only to their registered personnel. Other companies will give you the signals generated by their internal trading systems for a monthly fee. Using trading systems can provide you with similar analysis that you would receive from a financial advisor, potentially at a fraction of the cost.
Some of the cons of using trading systems include:
- Trading systems are complex. This is perhaps their biggest drawback. Even if you are using an existing trading system, it's important to be familiar with the parameters that make up the one you are using. Learning all of these skills can be a challenge, and can often create confusion and misapplied trades.
- You must be able to make realistic assumptions and effectively employ the system. Even though trading systems can improve your success level in your trading, it is important to remember that not all executed trades will be winning ones. No trading system can guarantee a 100% success rate. Also, if you are not using the trading system correctly, you are much more likely to enter into unsuccessful trades.
- Beware of scams. There is a lot of validity to the old saying, “If it seems too good to be true, it probably is.” Many trading systems on the market today promise unbelievable returns with little or no effort on the part of the trader. Be sure to exercise common sense. A good indicator of legitimate trading systems is the offer of a free trial of their product.
There are many products on the market today that offer assistance in trading the market. If you're looking for help with trading stocks, options, commodities or currencies, Wizetrade can help you learn to spot buying and selling pressure in the markets. Learn more about Wizetrade.
