How to Create an Online Stock Trading System

Aug 10, 2010
Daniel Peters

Nasdaq Stock Market Advertisement - Kowloonese

Successful stock market investors use online trading systems. The following items are hallmarks of a good strategy...

Online stock market trading systems are powerful strategies and techniques combined into a solid plan. Certain components are common to most plans.

Online Trading System Strategy

Before deciding upon stock selection or even money management rules, the investor needs to decide upon what style of trading appeals to him. These are some large and sweeping online trading system styles.

These are just a few of the ideologies that can be adopted. When debating on which system is best for each individual investor some questions should be asked such as:

How much risk is the investor willing to assume?
Is the investor interested in holding for long periods or trading frequently?
How much time does each method require in learning as well as trading?
How much money is the investor willing to pay in monthly subscription and platform fees?

Some trading styles require lightning quick Internet connections, expensive trading platforms, and specific information feeds. Momentum traders that follow the news can hardly sit around and wait for the print edition of Forbes to be sold at the local newsstand. Likewise, rebate trading requires hundreds of trades per day with extremely low commission rates.

Other methods require copious amounts of time to learn the nuances of the system. Fundamental analysis and value investing means the investor will be crunching numbers to determine intrinsic value in publicly traded companies. An investor does well to determine what is needed in the way of time and money for each system.

Technical Analysis

Many systems rely on analyzing chart patterns, candlestick formations, or at least use some technical analysis indicators such as moving averages suggest timely buying and selling. Learning how each indicator works takes effort. Below is just a sampling of some of the more popular technical analysis tools available.

Average Directional Index (ADX)
Directional Movement Index (DMI)
Money Flow Index (MFI)
Moving Average Convergence Divergence (MACD)
Relative Strength Index (RSI)
Bollinger Bands
Stochastics
On Balance Volume (OBV)
Parabolic Stop and Reverse (PSAR)

Money Management

A system might be right 85% of the time, but if the plan has poor money management techniques the investor can still lose all of his capital. People who bet all their money on a coin toss will eventually guess wrong no matter how many times they can double their money.

Money management techniques include allocating a set amount of capital per trade. Conversely, the trader may calculate the amount of acceptable loss per trade. Some use what is called the ‘2% rule’. This principle dictates that a trader should not lose more than 2% of his capital on any one trade. It assumes a decent initial float size, but it also allows a trader to make 50 or more failed trades in a row before his capital dries up.

A healthy money management plan should include rules and guidelines when disaster strikes. For instance, what steps need to be taken when the market turns bear? Should the investor sell all his stocks or just a portion? What about buying put options as insurance? Or what of VIX options that increase in value as the market prices drop?

Stock Picking

Stock selection methods will vary depending on the strategy. Rebate traders will want stocks that are extremely liquid. Swingtraders will require volatile stocks while value investors are choosing from undervalued blue chip shares.

Only after the trader fully comprehends his overall strategy can he use automated screening tools to select the right stocks. Factors that need to be considered depending on trading strategy are liquidity, exchange traded, industry, volatility, patterns in price, trends, earnings, and so forth.

Trading System Rules

The online system will also have entry and exit rules. Some will want to focus on this exclusively, but sound trading plans should encompass all the aforementioned components.

Trading rules should include:

When to enter a trade
When to cut losses short
When to take profits

Combining Parts for an Online Trading System

This is not a definitive list for an investment plan, but it is a good start. Profitable investing involves learning, patience, practice and usually an online stock trading system.