Share Trading
Designing a Share Trading System
There are tens of thousands of stocks worldwide you could invest or trade in. How do you pick the best?
You need a screening system - a series of sieves, each of which excludes stocks that don't match your criteria. Eventually you will be left with just a few stocks to examine in detail.
If you want to design your own trading system, how can you do it?
Getting Started with a Stock-Trading System
At the most basic level, you need to do two things.
1. You need to write down "buy" and "sell" rules. These rules will sieve stocks to tell you which stocks you should buy, when you should buy them, and when you should sell them.
2. You need to test your rules to see whether your system is likely to make a profit. It's easiest to do this if you have several years' worth of historical share price data. Fortunately this sort of data is readily available.
Your First Trading System
I'll assume you are new to trading systems and I'll begin with a system using very basic of trading rules. These could be, for example:
Buy Rule: If yesterday's closing price was greater than the previous day's closing price, buy the stock today when the market opens.
Sell Rule: If yesterday's closing price is less than or equal to the previous day's closing price, sell the stock today when the market opens.
I've provided a very basic Excel spreadsheet to show you how you could implement these simple rules.
At this stage, you need to test whether your trading system is likely to be profitable.
To do this, you should test its performance with a wide variety of stocks. Test it over different time scales too. For example, you might want to check each year 1999, 2000, 2001.....2006 separately to ensure your system was profitable in every year.
Now look at your results. Was your system profitable? Remember it has to cover your brokerage costs before you can count it as successful.
You will almost certainly find the system we've used as an example above is not a profitable one. Your second trading system will need to be more sophisticated.