Disadvantages of Using Trading Systems

Trading systems are convenient tools for optimizing your stocks or foreign exchange trading for profits.  These systems are automated and designed to generate signals and perform actual trades with obvious benefits accruing to the trader using the system.

While they may have their obvious benefits and advantages, trading systems are not perfect and possess some inherent disadvantages.

Trading Systems and Methods (Wiley Trading)

Simulated or Actual Results

The biggest disadvantage so far of a trading system is that these are rather complicated animals. Creating a trading system requires a solid knowledge of technical analysis, the  ability to decide empirically, or a comprehensive understanding of the functions of trade parameters on which they are based.  While you may not be involved in the development of the system, familiarization with trading parameters can be equally challenging.

In order for a trading system to become effective, you need to have knowledge of how to differentiate simulated from actual results. This is known as “slippage” and represents one of the major pitfalls in the effectiveness of a trading system.

Time Consuming

The task of developing your own trading system is time consuming. Getting it to run and work effectively requires that you have tested it for some time. You also need to do a paper trade in real time to ensure that your system is reliable. The factor of slippage may also come into play, which will eventually require you to completely revise your trading system.

As has been mentioned earlier, you need to be careful when choosing a trading system. There are firms that are out to get your money and offer a system that does not work.  A trading system can indeed be a useful and convenient tool to novice traders who wants to succeed and make a living out of stock or foreign exchange trading. But you need to really choose wisely.

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Learn Stock Market Basics

Learning the basics of the stock market is essential if you’d like to understand how people make great piles of money in the stock market trade.  The news of a friend who made a bundle with day trading or a colleague who stumbled into a hot stock tip may induce you to jump into the stock market as well.

Investing in stocks can indeed build up your investment portfolio. However, if you’re not careful you may end up losing a lot of money in the end. So it’s rather important that you at  least understand the basics of the stock market before you begin investing your money in it.

Do you know that the stock market is composed of two sections? The first is the primary stock market where the shares are created by companies and are generally offered to the public first through an initial public offering or an IPO.  Then there is the secondary market where established stocks are exchanged and traded among investors without the involvement of the companies who issued the stocks. Usually when people think about investing on the stock market, they tend to think only about the secondary market.

What are Stock Market Shares?

What are stocks or shares of stocks? Shares, or stocks, are individual pieces of ownership of publicly listed companies. When companies need to raise capital, then sell off little portions of the company so that investors may become partial owners of that company. Eveytime you buy a stock you buy a share of ownership in a publicly listed company. You become a shareholder. As you increase the number of stocks you have in one particular company, you increase the percentage of ownership you have.

Now that you have become a shareholder, you are entitled to your share of the company’s earnings. These are usually paid as dividends, although not all companies offer dividend payments. You’re also entitled to exercise any of the voting rights that may be attached to that stock.  However, this doesn’t mean you have a say in the daily operational running of that business.

Stock Market Investment Strategies

There are several types of stock market investment strategies. Day trading is growing in popularity as a way to smaller investors to begin building capital. The basis behind day trading is to buy a stock in the early part of the trading day and hopefully sell it again at a profit before trading closes.

Long term investors tend to purchase many different stocks in a diversified range of companies in various sectors to spread their risk. These investors tend to hold stocks for longer periods of time, allowing the value of their stocks to appreciate. They also receive dividend payments, either in the form of a check or as a dividend reinvestment plan, where the company issues stocks to the value of the dividend payments to the shareholders to add to their portfolio.

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Profit From Bull And Bear Runs

Bull and bear runs describe the current state of the stock market. Bull runs refer to good market value and lots of selling activity while  bear runs is synonymous with depreciating market value. If you keep your eyes open and keep your finger on the pulse of the markets, you can survive a bear run at the same time make a fortune during a bull run.

When the stock markets go through a bull run, the typical notion is that the market is on an upswing. Your stocks will fetch a high price now.  You will then be subject to the usual  dilemma: should you hold on to the stock or worry if it would end up below the price you had actually bought it for?

What is the wisest thing to do in this case? I’d say sell a part of your shares and hold on to the rest. That way you stand to gain when the market corrects itself.

When the stock market is in a bear run, things will naturally look  bleak. This is the period for you to be cautious. However don’t panic when the prices of your shares fall. Just be watchful.  People usually sell their shares in a bear market because they fear the worst. This hits the market fortunes badly. If indeed the prices of your shares of stocks spiral down steeply, it would be advisable to sell them off. But it’s not wise to just entirely throw away everything.

Is there a way to use the bear runs to your advantage? In fact there is indeed a way to benefit from the bear markets. There could be stocks which you wanted to buy earlier but cannot because they were priced too high. During the bear runs, these may have come down to a reasonable level. Now is the time to buy them. You can then wait for the stock market to return to a stable run. In that time, your stock investments would have gone up in value.

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Understanding Options Trading

Options trading is possibly one of the hottest endeavors today because of its promises of better rewards and benefits to investors. And if you’re one among many people contemplating to say goodbye to a regular job in order to put up a business online, options trading could be one of your better options.

What must you know about options trading? What are the rules to follow, strategies to adopt and other fundamentals you should know so that you can become a successful trader?

Options Trading Basics

Options trading allows you to trade a certain stock at a higher or lower price within a specified time frame. You’re then able to appoint the high or low price. Changes can thus be made in the prices especially when the market proves to be unstable. At the same time, higher prices can be assigned when the market is seen to be doing well. Since there is a targeted span of time for the expiration of the stocks, you are allowed to splurge into opportunities that entertain flexibility particularly in line with the predetermined outcomes of the market.

One option refers to about a hundred underlying shares in the USA. In  Australia however, the single option covers multiples of about a thousand of underlying shares. As the trading is can be done within a short time period, there are higher chances of collecting huge returns. On the other hand, the very nature of this trading likewise opens up probabilities of larger loss when the market is unstable.

The Nature of Trading Options

Options can either be traded in groups of similar stocks or in singles. Where lies the difference?  Trading of single stocks can create higher risks of volatility because a single firm may be pursued by a variety of factors. Meanwhile, by trading in groups, the volatility is removed.

More than investing a certain amount of money and taking intelligent guesses regarding the status of the trading market, you’re also required to be familiar with the rules and standards of trading. You need tools to help you out in determining the existing market trends. You need to be equipped with a solid set of guidelines that can protect your investments during every transactions.

Make options trading another rewarding opportunity that can enrich your financial standing by doing hard work and having patience. Your efforts at applying option trading techniques will lead to generation of profits and expanding your investments in the stock trade.

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Starting Stock Market Trading

If you want to invest in the stock market, a couple of options are open. Various investing strategies have specific advantages and disadvantages of their own, so it is important for you to research the details some stock trading strategies before you begin deciding on your stock portfolio.

Get the best broker

Get to register an account with the best stock broker you can find. It’s important to find a stock broker that suits your particular trading style.
Also check first what is the minimum deposit required for an account. This minimum amount varies between brokers. Some brokers offer discounted fees for traders who those who do stock trading regularly. They’re charged less often as when they’re willing to build a stable, diversified portfolio over time.

Margin Loan?

Will you be investing using gearing in the form of a margin loan or not? If you have the knowledge and experience to increase the value of your trades using a margin loan, then you may need to find a broker that will integrate a margin lending account with your trading platform. Gearing can help some investors to compound their profits, however in the wrong hands gearing can also magnify any losses.

Day trading?

You may have to decide what investment strategy will suit your investing plans better: whether a long term investing strategy or day trading activity. Long term stock market investors understand that dividends often make up a healthy portion of return on their investment dollars, while day traders know their profit comes from the pricing difference between what they paid and what they sold for.

Do Your Own Research

Which stocks you want to add to your portfolio? Here you have to do your own research. Read books or financial magazines to get an idea of how to choose stocks that will make a good addition to your portfolio. Learn and understand how to use various analytical data and pricing charts work to your advantage.

Are you the type of investor who wants dividends to be paid in cash? Or you just need to reinvest the dividends to compound the returns? Some companies do not pay dividends. Most companies offer the option of dividend reinvestment in the form of stock allocation. This means that instead of receiving your dividend payment in cash, you get the equal value in terms of additional stock shares added to your account. Dividend reinvestment can help you grow a stock portfolio as you’re not paying broker’s fees on the transaction and you’re increasing the amount of stocks you own in that company each time a dividend payment is due.

These are the few of the things you need to decide especially when investing in a diversified portfolio over the long term.

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