Systematic Stock Trading Methods

There are several approaches to trading stocks. With a systematic system you develop and use a strict set of rules and criteria that signal when you should buy and sell. The counter to a systematic system is discretionary trading, where trades are made based on the trader's experience and information coming into the stock market.

Using Technical Analysis Indicators

With technical analysis, traders use the price and volume data of stocks to develop signals that predict the future direction of share prices. Traders and programmers have developed a wide range of indicators that can be used to analyze and predict stock prices. A systematic trading plan looks for pre-determined data points from one or more technical indicators to signal when to open a stock trade and when to close out the trade. The system signals take away any discretion of when and in what direction to trade.

Trade With Off-the-Shelf Systems

One benefit of systematic systems for a new trader is that there is a wide range of already-developed systems that can be obtained and employed to start trading in a short period of time. Experienced and successful traders often make their systems available, either for free with the opportunity to pay for coaching or as a premium trading system. A trader who wants to develop his own system can save time by starting with an existing plan and modify it based on the criteria he thinks will produce profitable trades.

Take Out the Emotion

Taking the emotion out of trade decisions is a major benefit of a rules-based trading system. A trader who succumbs to fear or greed can quickly end up with a zero balance trading account. Trading systematically means following the pre-set signals, taking any emotions the trader feels out of the process. If the trader finds that he is losing money, past trades can be evaluated to see if the signals are being correctly interpreted or if the system needs to be adjusted.

Systems Fail in Some Markets

The biggest drawback to systematic trading in the stock market is that no system will generate profits in all market conditions. For example, trendless price action may produce false trading signals, leading to lots of small loser trades. A stock trader probably needs to know several different signal systems and be able to determine which is providing the best trade opportunities based on what is happening in the stock market. As a result, stock traders will typically put some discretionary decisions into their overall strategies.

Photo Credits

  • George Doyle/Stockbyte/Getty Images

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

Zacks Investment Research

is an A+ Rated BBB

Accredited Business.