If you want to be a winner on the stock market you should develop you own investment system (do not confuse with trading
system). Creation of investment system should have two specific purposes. The first one is about the ability to anticipate future movements some time before and the second one to avoid states of “wipe saw” (to buy if stock increases and then see how it decreases. After this the market makes the reverse movement, i.e., increases). Some analysts guarantees the success if your system achieves both goals. Usually, as seen they are contradictory to the greatest extent.
Therefore it is accepted that a good investment system is one that accepts a compromise between the two purposes, namely: firstly pay more attention to anticipation and then think about “trap moves” that may occur at any time.
First step
Setting up times of trading.
If you already know what kind of investor you are: day trader or swing traders and how much you want to keep the action then you will know how much you want to stand in front of a graphic or your own portfolio. Thus you will find out what time of transaction you are interested in. So the time or the time horizon is
an essential element to be known and time frame of this system. You can use several trading periods when you want to establish better signal trend.
The second stage
Find technical indicators / oscillators that help you best to find a new trend.
There are many indicators and technique oscillators that can help you establish a signal for a new trend or a trend in general. For a simpler way, not necessarily the best for everyone, it is recommended to start with moving averages, simple or exponential, coupled by two or three short medium and long
or so.
It is important to choose those you best understand, fits the type of investor and will bring the best results.
Find out who is the indicator / oscillator which confirms the trend or new movement in
the market.
Since the first goal of the investment system is to anticipate the movement of capital market, that is to anticipate the movement trend, for a more accuracy we need confirmation of the trend.
This confirmation, as you will see, binds more with the second goal of the investment system and therefore the ability to prevent the “false” movement. Any new identified signal must be confirmed before taking a decision.
In this case most frequently are used MACD indicators (Moving Average Convergence/Divergence) is the MACD and its histogram. Besides these are recommended two other indicators – CSR and STS (stochastic or statistical).
A successful combination of these two categories of indicators – to signal a new trend and to confirm it – especially a correct interpretation of them gives you a greater confidence in decisions.
There are a variety of indicators and oscillators techniques. Therefore it is better to choose them to be as simple and easy to understand. There are more complex indicators, multiple indicators, etc. created by robots. It is better to leave them for later.
The fourth stage
Define the risk
This part is usually neglected or treated superficially and therefore often investment system fail DEMO testing and then the real.
In this case it is important to know how much are you ready to lose. You are not Goldman Sachs to win daily transactions and eventually even the best brokerage firm will lose. Why? Because anticipations are not always correct. A percentage of 60-70% is already very good, and traders and brokers know it.
Thus they establish a political risk to avoid greater losses. Field dealing with this is money management and risk management.
For our investment system is good to have already fixed before investing how much you accept as losing. You need to be aware that a greater risk means greater losses, so it’s not wisely to risk too much.
Step five
To be able to define entry and exit points from capital market.
Once established the above items you should already think about finding input and output moments depending on the signals offered by the system. Here two things matter: how to interpret the signals and when you do it depending on the signals provided by the graph.
In this case can be three options: you enter the market at the appearance of the signal before it shut down completely (it’s like you have a candle burning when enter moment appear and burn until the signal has been confirmed at least for 1-2 times). Others do it when at the half lighted candle, not expecting a more clearly confirmation.
For output moment there are several criteria. Each takes up this set and choose what suits: levels of support / resistance, a fixed target or trailing profit, achieving a particular level of an indicator / oscillator technique used to exit (RSI, STS, etc..), other techniques related to patterns theory and their size adjustment, etc..
The problem is that you have to know this target before entering the market and if it will be achieved you have to be disciplined and respect it.
The six stages
Write rules that result from the above and follow them.
This is the most difficult part of an investments system to be good. It is good theoretical until to apply. If applied is not respected, especially as it corresponded to both the demo and then tested several times in real life (some say 14 days in a row), then the culprit is of the owner.
So before you get to tailor your own investment system is good to know what it contains and if we are able to respect it.
Keep in mind that it is not hard to make a system of investments; it’s hard to follow it!
