Do You Need A Stock Market Trading System?

Not many folks are naturals at making money at investing in the stock market. Few people have a stock market trading system built into their character, but they are rare. However, most of us mortals, don't have this ability. Most of us struggle and make some money here and there and then lose a huge amount of money on one or two trades.

After recharging , we begin again with our diminished account. This time, we are going to be more careful. We will hold-up until the market is really boiling. We get in, inopportunely, at the peak of the trend, and we get handed our hat - again.

Investing is counter-intuitive. You cannot win at trading the stock market, based on your emotions. That is how most people trade. The skilled traders know that you are trading emotionally, and they take advantage of that fact. Believe me, they aren't trading emotionally.

So what is the average individual, with retirement coming up soon, supposed to do?

Principle #1: Safety & DiversityTrading individual stocks can be perilous. There are so many factors that can upset the performance of an individual stock, people shouldn't be trading them. Why not, you say?

Here are just a few of the factors that can cause a stock to move fast:

* Earnings come out just below expectations
* The chief executive of your high-flying tech business is diagnosed with a dread disease
* Your company announces that the financial statements are going to be delayed this quarter
* Another leading company in the same industry, not your company, reports inadequate earnings
* The government decides not to approve your company's drug
* There is a calamitous accident such as what happened to BP
* The list is mind-boggling

For this reason, you need to invest in broad-based indexes of stocks such as the Russell 2000, the S&P 500 or others of that character. That way, the individual stocks can "fall out of bed", or do whatever else. It won't upset the index much. The broad-based indexes are affected by broad-based factors such as the overall consumer economy, financial trends, the government, inflation, armed conflict, 911 and other such incidents. You must diversify your risk over a huge number of stocks; diversification leads to security.

Principal #2: Ease of tradingLet's face it. Unless something is easy to do, you won't do it. You are working trying to make a living. If you are retired, you have a number of jobs your spouse says are essential for you to do. You might have children and grand-children located across the country, or around the world, that you like to visit.

If you think you have the time to analyze each company's balance sheet and income statements, look at the various pundit's ratings, listen to the company's reports when they announce earnings, look at the competition in the sector, and subscribe to a service that promotes a stock that they have already purchased, then you need to get a better life.

On the other hand, if you buy an ETF (Exchange Traded Fund), such as SSO, that's not difficult. SSO is an ETF that represents the entire S&P 500. It trades like a stock. When you purchase SSO, you have bought a proxy for the S&P 500. Oh, did I forget to mention: an one-percent move in the S&P 500 is more or less a two-percent move in SSO. That means if the S&P 500 goes up 1% your holdings in SSO go up 2%. SSO is a leveraged ETF. It is leveraged 2X or 2 times.

Does the market always go up? Absolutely not!Wouldn't you desire to make money when the market is tanking? By the way, when a market moves down, it does so very rapidly, usually. A market retracement can eliminate the gains that you have accumulated over a large period of time. If you want to make money, you can't do it by standing on the sidelines in bad markets.

Soooo You buy SDS. As the market goes down, your SDS's value goes up. It is an inverse-ETF. You have been cautioned that you should sell your holdings during times of declining markets. In fact, many years ago, I subscribed to a financial newspaper, with the initials IBD, that uncovered stocks that were showing a "cup with handle" formation. Cup with Handle worked! The trouble was that IBD continued to promote "cup with handle" formations at the same time as the market crash of 2003. They never suggested that you should get out of the market or heaven forbid, go short the market. Now you have a resolution to that predicament. Simply buy SDS and gain as your buddies are whining about a crappy stock market.

Principle #3: Time the Stock MarketI know. You have read many articles that imply that you cannot time the stock market. If you have a stock market trading system, you can time the market.

You need something basic like: The market is bullish. Or, the market is likely to go down. Or, who knows? Sell your holdings and wait for a trend to develop.. You have to be on the right side of the market. Never go short a rising market. Never go long a market that is falling. These principles look so simple, who would ever violate these rules? Many people do. I know I have.

The trick is getting in on a trend. You don't mind if the market is advancing or collapsing. You have to go with the trend.

Will you get into the trend at the very beginning of the trend? Probably not. But you will get in early enough to get a good bit of it. Will you get out in advance of the trend changing direction? Probably not. But, you won't be holding, and hoping, as most or all of your gains evaporate into some professional trader's checking account.

When the market is not trending, you need to get out. Sell your holdings and pause - this is very wearisome for some traders, by the way. Many people are so eager to make money, that they assume that they have to be in the market almost or all of the time. They over-trade, and get a little buzz cut here and a little buzz cut there, as the market moves back and forth. Pretty soon, if they do this for a period of time, they end up bald.

Can you depend on a good stock market timing system getting it right, almost all of the time? I have never found one. But there are a number satisfactory stock market trading systems available that make more money than the average trader can make.

If you are able to get the timing services trade dates, you will examine at them and think, "Well, I could have done better than that." Actually, you probably couldn't - or you wouldn't be reading this article. You might consider the trades and think, why didn't they get in there? The market was going up there. They would have made a great deal more money if they had entered the trade earlier. If you think like that, you are afflicted by 20-20 disease. Or, perhaps, you should be renting out your time machine, or crystal ball instead of trading in the stock market.

Principle #4: Many strategies are worse than useless.Timing services are not dead-on. Let's accept that fact. In fact, pundits have stipulated that "buy and hold" is the method to invest. Well, let's look at the last 10-years. You would have lost about 28% if you bought and held. If you had bought into almost any mutual fund, you most likely would have lost almost as much. Check out several of our other posts that discuss these facts.

Perhaps you should simply "dollar-cost-average". That means you buy a fixed dollar amount of stock every month, or every year even if the market is going up or down. That hasn't worked in the last 10-years either.

How about somehow finding a stock that is going up and keep buying more shares of it as it goes up. Believe me, that doesn't work either. Does GM bring memories back? Does AT&T or Cisco do anything for you?

Ok then. What about following the maket advisers? They are TV every day. There are countless investing blogs. There are services, I won't mention any names, that advertise crumby, low volume, stocks to buy. If they have thousands of subscribers buying, the stock, that stock will go up. Then, of course, they sell before you do. You are left holding a stock that only the market maker will buy from you.

Here it is!. Buy a stock that has taken a big fall and is at the bottom and ride it back up. If you have been trading for a while, you will have learned this education, too The point at issue is this. Where's the bottom. Stocks can and do go down lower than you could ever imagine. They can break support and go down in great, gut wrenching strides. If you buy at what you think is the bottom, you might find that you are now a "long-term investor". You convince yourself that If you hold it long enough, the stock will have to come back up - but it doesn't have to come back up.

Money Management StrategiesIsn't that what the old Merrill Lynch, publicized as their accounts - money management accounts. I had one of those. That's not what we're talking about now. If we are going to have a stock market timing & trading system, we need to employ money management.

We need to somehow know when to "take the money and run"! We cannot go into all the specifics in this article, but to give you the simple principle, you have to take profits as the stock, or broad-based index is moving in your direction. When you have the right amount of profits, which is defined by the money management system, then, you should harvest them. Sell your holdings and put the money into your account, before the market changes direction and takes your profits away.

If you do follow a defined, tested, money management system, you will find that you don't have to be racked as much draw-down. Draw-down is defined as how much you are willing to lose from where you bought, before the market goes back into the positive direction - or, in many cases, you discontinue the trade. However, if you take the gains when the trend is very likely to end, you improve your account balance.

In summary: You need to gain security by diversification. You have to have an easy to comprehend stock market trading system that doesn't take a great deal of your time. You have to have a way of knowing whether the market is bullish, bearish, or should you sell and be out of the market for a while. You need to know when and how to take profits as they present themselves. And, finally, you need to know which methods don't work.