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How a Black Box Trading Plan Can Drag You Down
By John | March 9, 2010
The secret to explosive trading profits is a good trading plan. You’ll definitely get nowhere without one. It’s common though to come across traders who lose everything while trading even if they do have plans. There are many reasons for trading failures but one possible reason is sticking to mythical beliefs.
One incorrect belief that some traders maintain is the idea that there is a magical technique that can spit out instant signs or indicators. They tend to buy into the concept of a holy grail trading tool that can make everything easy for them. In some instances, this perfect system comes in black box packages.
Techniques that are known as black box trade systems are meant to be used with little thought. You probably don’t even have to learn trading in depth. All you need to do if you have one is to input a minimum amount of information and leave everything in the hands of an automated program. This is supposed to give investors the benefit of a hassle-free procedure that can be left on its own so users can focus on other more pressing concerns. Such methods are appealing to people who do not have a lot of time to monitor their investments. Black box concepts however have their own inherent disadvantages.
One definite issue that you would have to contend with is the loss of control over the few factors that you can normally manage. One such factor is trading risk management. With a set plan, you can’t put your hand into making rules that will limit your risks and losses at levels that you can live with. Since every single trading step and component is already laid out for you, you don’t have much of an option but to take what a package provides. Once your risk preferences are taken out of consideration, you might just lose more than you can endure losing. It’s reasonable to say that black box systems can be the cause of personally distressing losses.
Good traders often prefer to use systems that they can tweak to match their trading styles and risk tolerance. Part of the customization process involves identifying the maximum single trade allowable loss, capital availability and time available for trading. You are at a better position to profit from trading if you make a cautious assessment of these factors from a personal perspective.
A customized strategy can therefore do more than keep you organized. It is also the one secret that can help you proceed logically and with as little emotional involvement as possible. Because you know you have a sound framework on hand, you can make decisions without having to suffer doubts, nervousness or insecurity. In other words, your personal blueprint can give you the right degree of confidence that you need to pursue significant gains.
Aside from making sure that your system is customized, you should also take the extra time to back test it. Back testing devices can test trading systems against historical trade data. A plan that has a good chance of doing well will also most likely perform well with past data.
A trading plan is definitely your best weapon against trading failure. Do remember though to pick a plan that doesn’t fit into the category of black box systems.
Topics: Trading |
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