General Article

Understanding A Trader’s Edge

The Stock market Crash of 1929 caused many individuals to lose fortunes. There were a few individuals who correctly predicted the direction the market would take and made millions by taking the opposite side of the trade. Jesse Livermore was a famous trader who made over $100 million by predicting the stock market would go down. Most of market participants believed the stock market gains from the “Roaring 20’s” would go on forever. It is easy to look at stocks or the market in hindsight and wish we had known to execute the trade that could have been a 10-bagger investment.

Some of the great investors make the art of choosing stocks easy. It is difficult to accurately make a stock market forecast correctly. There are advertisements that claim to have a stock picking strategy that is almost one hundred percent accurate when in truth this is just impossible. The unfortunate individual spends their hard-earned money with unrealistic expectations on potential returns. The prudent trader understands that they will not make money on every trade. They incorporate technical analysis and algorithms to at least give them an edge.

Technical analysis is when the trader uses various charting tools to predict the price action of a company’s stock, currency or commodity. Technical analysis involves understanding chart patterns and indicators to identify key levels of support and resistance and the trend direction of the asset. Technical analysis ignores the fundamentals of the underlying company and focuses on price action. Momentum indicators are a popular choice many traders incorporate. They measure key overbought or oversold conditions and are perfect for predicting the direction a stock is about to take. Almost all trading platforms have basic technical indicators programmed in for a trader’s convenience.

Applying algorithms as part of your stock trading strategy is a step above doing your own technical analysis and can help you as trader place higher quality trades with a better probability of success. You’ve heard the saying “history repeats itself”. Algorithms are based on past data. Then applying an algorithm to a trading strategy, the trader believes that the algorithm accurately predicts the movement a stock is about to take. Humans are not capable of processing the vast amount of data that comes from the stock market on a day to day basis. With the right tools available, a trader can make accurate forecasting decisions, pick up accurate market trends and make stock market predictions. Algorithms help a trader decide when best to buy or sell a stock. This helps to eliminate some of the emotion involved. It is the algorithm that predicts the direction and the trader places the trade when the algorithm provides the right signal.

There are no certainties in life and no guarantee you can give up your day job and let the market work for you. However, if you aspire to be a great trader, going beyond regular technical analysis and incorporating algorithms may be the first step to giving your trading and edge and making the money you desire.