guidebook articles links contact

Stock Trading Systems


The Holy Grail Stock Trading System

It’s a tendency of many new chartists to feverishly search for the Holy Grail stock trading system. They think if they just look hard enough and study enough charts, they’ll discover that perfect pattern or oscillator.

The perfect stock trading system does not exist, but profitable ones certainly do...

What you want to do is give yourself a slight edge. If you discover a combination of techniques that are right only 50% of the time, you can make money provided your winning trades are larger than your losing trades. You can even be right less than 50% of the time and still make money, as long as your winners are sufficiently larger than your losers.  So long as you have a positive expectancy, you’ll make money, even if you have lots of losing trades.

Expert Recommendations


Once you become even slightly familiar with technical analysis, you’ll realize that many stock brokers and analysts recommend stocks that look absolutely horrible from a technical analysis perspective. They violate basic TA principles like buying in the middle of a downtrend.  Unfortunately, some people take on “expert” recommendations as their stock trading system.

Maybe these analysts and brokers will be proven right. Maybe whatever they’re touting will stage an amazing reversal or break through resistance. On the other hand, maybe it won’t. Why not wait until the charts look good, and then buy?

Don’t Try to Catch Falling Knives

Many people love to trying to pick bottoms. Their stock trading system is to buy stocks thinking they “can’t possibly go any lower,” only to get killed when they fall even lower. If you follow technical analysis, bottom picking starts to look less and less attractive. Most times bottom picking involves buying stocks in horrible down trends. The fact is, yes, you will lose some profit by waiting the trend to reverse, but you will also spare yourself much pain by avoiding jumping in front of a speeding train. For those just learning technical analysis, it’s probably best to avoid bottom picking all together.

Money Management

Even the best stock trading system is completely useless unless it’s used on conjunction with proper money management—that is, at what point you cut your losses and how much of your total account you put into each trade. Here are some practical notes on properly putting together your own stock trading system.

Always Cut Your Losses Early


Your stock trading system can be right 90% of the time, but if the 10% you’re wrong destroys your account, you’ll never make money. That’s why when it comes to learning how to trade stocks, you cut your losses and admit when you’re wrong. You should exit a trade when the reason you entered it, from a charting perspective, is negated. For example, if you buy XYZ because it’s bouncing off its well-established trend line, then XYZ suddenly falls below its trend line, it’s time to cut your losses and sell.  Of course, admitting you’re wrong is easier said than done, which is one of the reasons why the psychology of trading has been studied quite a bit.  A great book on the subject is XXXX.
The 2% Rule

How much of your account should you allocate to each trade, and when should you cut your losses? As a general rule, never risk more than 2% of your total account on each trade. This way you can be wrong 50 times in a row before you lose all your money. That does NOT mean you set a 2% stop-loss (a predefined exit point) on each trade.

It does mean the following:

  • Let’s say you have a $10,000 account; 2% x $10,000 = $200. That means you can risk $200 per trade.
  • In a $10,000 account, you can make a $4,000 trade IF you maintain a 5% stop loss
    ($4,000 x 5% = $200).

Although 2% is considered an acceptable risk, many traders still consider it too chancy. If you want to risk 1% or even 0.5% per trade, then by all means, do so. Risking as low as 0.5% of your account per trade is quite prudent. On a $10,000 dollar account, that translates into $1,000 per position with a 5% stop loss.  

First, determine what % you want to risk per trade, then adjust your position sizing accordingly.  Remember, if you follow the above advice, you cannot go too wrong when putting together your own stock trading system.

Glossary | Terms of Service | Privacy Statement
© TAguide.com 2007