A stock market trading system is essentially a set of rules used by a stock trader to cover the whole trading process. That is, it identifies which stock to buy, how much to buy, when to buy and when to sell. A simple system might look like this:
1. Buy rising stocks in rising industrial groups on a breakout from a 5-day consolidation
2. Place a sell stop just below the consolidation area
3. Aim to loose only $200 if I am wrong
4. Move my stop loss up to break even after a gain of 5%
5. Continue to move my stop loss up after every 5% gain until I am stopped out
Someone who invests in stocks for the long term would have a totally different set of rules as would a day trader. Your rules need to match what you want to accomplish.
Stock traders generally use one of four stock trading systems:
One of the more common systems people use is no system. As strange as it may sound, not having a system is still a system. Stock traders in this category just buy on a whim with no real thought as to why they are buying the stock, no understanding of the risk profile of their position and no exit strategy. They likely react to something that they heard about in some form of media or from other people. They learn essentially nothing from each transaction and tend to continually repeat their mistakes. If you use the no system approach to trading you may want to consider finding a more complete trading system.
Another common approach to trading is using what will be referred to as a
black box system. In this case, the trader is using a system, which was developed by someone else. Black box systems generate buy and sell signals but do not tell you why a specific stock was identified. They tell you what and when to buy and when to sell. The major drawback of these systems is that they do not teach you how to improve your understanding of the stock markets. Like most things, they range in quality from good to bad, with the good ones being quite expensive. If you are heading in this direction, do a lot of research before you buy.
There are many professional traders out there who offer courses to teach you the system they use to trade stocks. These traders are also selling you a stock trading system,
their system! While the system they are teaching you works for them, you must remember, in many cases it was tailored to their lifestyle not yours. You need to be able to adapt their system to match your personality and risk tolerances. With a large variety of systems being taught, you should be able to identify one that comes close to how you think about the markets and as such may only need to make minor adjustments to the strategy. In these systems, you know why a specific stock is being recommended for purchase. If this taught system is well thought out this can be a valuable learning experience and potentially can start you down the road to being a better stock trader.
The final system, which will be discussed, is the
self taught method. In this trading system, you may learn about stock trading from a number of sources such as introductory lectures, magazines, books, websites, TV etc. You would then take this information and over time develop your own trading style by back testing your ideas, paper trading or cautiously trading an account. By keeping good records of what you are doing and by continually upgrading your education, you will slowly improve your trading skills to the point where you should be a profitable trader.
No matter what system you ultimately use or develop to trade stocks, it will likely cost you a fair bit of time and money. Whether you spend your time and money going to training courses, reading or trading the market, becoming a good trader, like becoming good at anything, will cost you time and money.
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