Most people have a discretionary style of trading which means that the decision to buy or sell a stock is not based on fixed rules but more on the feeling of the person about a certain stock and the feeling of the overall market. They watch the news heavily, inform themselves through reading newspapers and magazines and then, when they feel the time is right, they jump in.
This, for some people, can work, but most people will lose money trading this way. You eventually end up buying at the highest point possible and straight after you bought, the stock goes down. The reason this happens is that you are highly influenced by the news messages.
The so-called experts on TV tell you all kinds of things what to buy and when to do so.
These people can be divided into 2 categories:
1. Journalist: They are making a living as a journalist, NOT as a trader!
2. Analysts: They are paid to analyze but I have never seen a rich analyst who makes millions of dollars trading his own money.
A far better way to trade is to have written rules of when to buy and to sell and have these rules programmed into a software. This takes the emotion and discretionary part out of the decision making progress and through back testing software you can scientifically prove if your decision making process has an edge, how big the edge is and how much money it has made, based on past performance with historical data.
If the edge is big enough, we are able to trade it, and your only task is to follow the daily trade setups that the software provides you.
The daily process is easy and can be done in less than an hour but mostly a lot faster.
1. Download the latest prices of all stocks after the market close
2. Scan with your software for buy and sell signals
3. Enter these signals in your broker software and….voila, you’re done
There used to be a famous group of traders called the turtles who, in beginning of the eighties were trained by trading legend Richard Dennis (he turned 2.000 USD into 200 million dollar).
This group was taught a completely automated trading system based on simple entry and exit rules. After their training period when they started to trade live in 4 years they made together over 100 million dollar. I once had dinner with one of these turtles and he confirmed me that the workload – after having done the required studying – was very low, maybe 30 minutes a day. Not bad for making 100 million dollar!