With the Global World Economy growth in the last hundred years, the necessity of liquid stock markets was appearing. Recent studies suggest that, over the past two decades,stock market liquidity has been a catalyst for long-run growth in the world. Without a liquid stock market, many profitable long-term investments would not be undertaken because savers would be reluctant to tie up their investments for long periods. In contrast, a liquid equity market allows savers to sell their shares easily, thereby permitting firms to raise equity capital on favorable terms. By facilitating longer-term, more profitable investments, a liquid market improves the allocation of capital and enhances prospects for long-term economic growth. Findings from these studies show that countries with relatively liquid stock markets in 1976 grew much faster over the next 18 years than countries with illiquid markets, even after adjusting for differences in other factors that influence growth, such as education levels, inflation rates, and openness to trade. The studies also indicate that, in promoting economic growth, a liquid stock market complements a strong banking system, suggesting that banks and stock markets provide different bundles of financial services to the economy. Finally, the studies show that lowering of international investment barriers significantly enhances the liquidity of stock markets, with positive effects on economic growth. Although stock market volatility tends to rise for a few years after financial liberalization, greater openness to international capital has been associated with lower stock return volatility in the long run. Thus we see that stock markets growth is conditioned by the economical forces, and the appearance and evolvement of various trading systems is largely taking into consideration the economical factor in calculating the reports.
Let us now define a trading system. A trading system is a set of rules that helps a user to achieve better results on forecasting stock markets behavior and guiding through the process of buying and selling stocks, currency and futures. A purpose of trading system is to minimize risk while maximizing profits. Trading systems software is designed to have several specific characteristics. First, it will consistently and reliably signal the entry and exit of a trade when a predefined set of conditions are met, but not under any other circumstances. This single factor eliminates the variability of human interpretation of trading indicators, one of the major sources of errors in trading. Second, it simplifies the task of trading by monitoring a number of trading indicators and consolidating them in a readily readable graphical interface. This feature eliminates the need for you to track many indicators across several charts, and minimizes errors in accurately reading the indicators. Trading systems are not necessary to become a successful trader, but they make the process easier and faster. For a trading system is composed of one or more trading rules. Each trading rule is in turn composed of a trading signal and an associated action such as buy, sell, sell short, etc. Trading signals are logical expression (true or false statements) written in the Investor/RT Real Time Language (RTL). RTL is the language used to compose scans, custom indicators, and trading signals in Investor/RT. Once a trading system has been defined in Investor/RT and given a name, the user can BackTest the trading system using historical data for one or more instruments. BackTesting refers to the actual execution of the trading system on a security, or set of securities over a given period of time. It simulates decision making based on past data, and is effective in refining systems in order to optimize future performance. Upon completion of the BackTest, Investor/RT displays a summary and a detailed report of the performance of the trading system over the specified period. The user can make revisions to the trading rules, add or remove rules, or adjust the trading signals used in the rules, then BackTest again to see if the revisions improved the performance of the trading system. When Back testing is done, the system is ready to go to a real user, to make real money.
Every trading system operates basing on the technical analysis of the market, so let us take a look at the basic technical analysis principles. Technical analysis examines past price and volume data to forecast future price movements. This type of analysis focuses on the formation of charts and formulae to capture major and minor trends, identify buying/selling opportunities assessing the extent of market turnarounds. Depending upon your time horizon, you could use technical analysis on an intraday basis (5-minute, 15 minute, hourly), weekly or monthly basis.
The Basic Theories :
- Dow Theory. The oldest theory in technical analysis states that prices fully reflect all existing information. Knowledge available to participants (traders, analysts, portfolio managers, market strategists and investors) is already discounted in the price action. Movements caused by unpredictable events such as acts of god will be contained within the overall trend. Technical analysis aims at studying price action to draw conclusions on future moves.Developed primarily around stock market averages, the Dow Theory holds that prices progressed into wave patterns which consisted of three types of magnitude–primary, secondary and minor. The time involved ranged from less than three weeks to over a year. The theory also identified retracement patterns, which are common levels by which trends pare their moves. Such retracements are 33%, 50% and 66%.
- Fibonacci. This is a popular retracement series based on mathematical ratios arising from natural and man-made phenomena. It is used to determine how far has a price rebounded or backtracked from its underlying trend. The most important retracement levels are: 38.2%, 50% and 61.8%.
- Elliott Wave. Ellioticians classify price movements in patterned waves that can indicate future targets and reversals. Waves moving with the trend are called impulse waves, whereas waves moving against the trend are called corrective waves. Elliott Wave Theory breaks down impulse waves and corrective waves into five primary and three primary movements respectively. The eight movements comprise a complete wave cycle. Time frames can range from 15 minutes to decades. The challenging part of Elliott Wave Theory is figuring out the relativity of the wave structure. A corrective wave, for instance, could be composed sub impulsive and corrective ways. It is therefore crucial to determine the role of a wave in relation to the greater wave structure. Thus, the key to Elliot Waves is to be able to identify the wave context in question. Ellioticians also use Fibonacci retracements to predict the tops and bottoms of future waves.
What to Look For in Technicals?
Find the Trend. One of the first things you’ll ever hear in technical analysis is the following motto: “the trend is your friend”. Finding the prevailing trend will help you become aware of the overall market direction and offer you better visibility–especially when shorter-term movements tend to clutter the picture. Weekly and monthly charts are most ideally suited for identifying that longer-term trend. Once you have found the overall trend, you could select the trend of the time horizon in which you wish to trade. Thus, you could effectively buy on the dips during rising trends, and sell the rallies during downward trends.
Support & Resistance. Support and resistance levels are points where a chart experiences recurring upward or downward pressure. A support level is usually the low point in any chart pattern (hourly, weekly or annually), whereas a resistance level is the high or the peak point of the pattern. These points are identified as support and resistance when they show a tendency to reappear. It is best to buy/sell near support/resistance levels that are unlikely to be broken. Once these levels are broken, they tend to become the opposite obstacle. Thus, in a rising market, a resistance level that is broken, could serve as a support for the upward trend, whereas in a falling market; once a support level is broken, it could turn into a resistance.
Lines & Channels. Trend lines are simple, yet helpful tools in confirming the direction of market trends. An upward straight line is drawn by connecting at least two successive lows. Naturally, the second point must be higher than the first. The continuation of the line helps determine the path along which the market will move. An upward trend is a concrete method to identify support lines/levels. Conversely, downward lines are charted by connecting two points or more. The validity of a trading line is partly related to the number of connection points. Yet it’s worth mentioning that points must not be too close together A channel is defined as the price path drawn by two parallel trend lines. The lines serve as an upward, downward or straight corridor for the price. A familiar property of a channel for a connecting point of a trend line is to lie between the two connecting point of its opposite line.
Averages. If you believe in the “trend-in-your-friend” tenet of technical analysis, moving averages are very helpful. Moving averages tell the average price in a given point of time over a defined period of time. They are called moving because they reflect the latest average, while adhering to the same time measure. A weakness of moving averages is that they lag the market, so they do not necessarily signal a change in trends. To address this issue, using a shorter period, such as 5 or 10 day moving average, would be more reflective of the recent price action than the 40 or 200-day moving averages. Aternatively, moving averages may be used by combining two averages of distinct time- frames. Whether using 5 and 20-day MA, or 40 and 200-day MA, buy signals are usually detected when the shorter-term average crosses above the longer-term average. Conversely, sell signals are suggested when the shorter average falls below the longer one.
There are three kinds of mathematically distinct moving averages:
- Simple moving average;
- Linearly Weighted moving average;
- and Exponentially Smoothed. The latter choice is the preferred one because it assigns greater weight for the most recent data, and considers data in the entire life of the instrument.
However all this above indicators are relatively few number of tools existing to analyze the market. Trading Systems are operating differently and use different principle of calculating information, they also offer different benefits. So let us observe them on several specific examples.
– The S&P 500 Alpha Day Trading System has been released in January, 1997. This system trades all markets from Futures contracts to Stocks. The principle of work of this system is to identify trend reversals. With a trend reversal we can enter the markets not far from the top or the bottom. This enables us to place the stops relatively near the top or the bottom and thus protect our position with a relatively small stop. So if the trend reversal aborts, our stop will be hit and we are out of the market with a controlled loss. But if the trend reversal goes on – as we were lead to believe with the indicators and patterns that we use – then we start benefiting from the new trend and the profits will be increasing as the trend gets stronger. Alpha Day Trading System offers users the following benefits:
- Trading approaches for Conservative Traders/Beginners and for Aggressive Traders.
- Closing well a winning trade is the hardest part of trading.
- Any time frame, same rules, even applicable to other indices.
However of course we can not be hundred percent sure about the results without back testing this trading system.
– Another trading system from the same manufacturer as the Alpha Trading system is Global Trading System; it can be used for Futures, Stocks and Options as well. And basing principle remains to be catching the reversal trend. However this version includes all charts from 30-minute bar charts to daily charts. This means the capability of trading options on a 30-minute and 60-minute charts. Here is what the system has got to offer:
- Making investment decisions
- Signals updates
- Options trading
- Stocks and Futures
– Channel Trend is another company producing trading systems however, it is primarily basing on stocks and also splits the software into several models, provide clients with information, rankings, and recommendations used to manage their stock funds and portfolios and improve their investment performance. Here are some of the models:
- Price Projector is a technical price model that projects the future prices and expected performance of stocks.
- Stock Valuator is a fundamental present value model that quantifies a stock’s fair value and its degree of misvaluation.
The Risk Model quantifies the magnitude of a stock’s risk based both on market and fundamental factors. The Risk model is a critical part of the Stock Valuator model. Stock Manager is Channel Trend’s primary stock model combining the information and rankings from the Price Projector and the Stock Valuator models. The benefits they offer are as follows:
- Systematic Investment Approach
- Decisive Information
- Rankings on 4500 Stocks
- Past Price Performance
- Easily Integrated Into Your Investment Process
– SP\U – is another software program for trading the Futures contracts only. The program contains mathematically constituted formulas which use basic data (open, high, low and last) from the daytime trading of the S&P500 Futures Contract to determine and track, short-term trends to their conclusion, at which time an opposite position is recommended. All positions are recommended at the close (MOC) of the trading (daytime) session. Stop losses (stops) are suggested to limit losses and , when moved regularly, to capture gains. This is not a day-trading system and therefore, has overnight margin requirements and overnight risk as well as benefits.
Let us now look at different type of the market and research on specialized trading systems that work on it. I’m talking about FOREX, so what is FOREX? Foreign Exchange (FOREX) is the arena where a nation’s currency is exchanged for that of another. The foreign exchange market is the largest financial market in the world, with over $1.5 trillion changing hands daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location, no central exchange. It operates through an electronic network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another across the major financial centers. As this huge market has to involve much communication going on btw. Enormous number of people, a separate system for processing the information and connecting people has emerged. MG Financial Group gives both individual and institutional players the ability to trade on the Internet. MG Financial Group’s strength and focus is providing online trading services for the foreign exchange market. Although MG Financial Group accepts orders over the phone or via the Internet, over 90% of orders are received through the Internet. MG Financial Group executes on average two billion dollars in leveraged spot foreign exchange transactions every month. The trading platforms offered for trading in this kind of environment are as follows.
– In April of 1997, MG Financial Group released the first version of its online trading platform. This trading platform enabled traders to view real-time quotations, execute transactions, and track open positions. Since the trading platform’s introduction, important features such as real-time charting have been added.
– Deal Station 2000TM, which went live on January 30th 2000, has revolutionized forex-trading platforms by offering traders the latest Java “Push” Technology, which immediately “pushes” new information to your computer, automatically updating your screens. The implementation of Java technology enhances overall system performance, which will result in improved speed and extremely fast execution time.
In addition to the platform, different benefits are also provided which makes the trade less time consuming and more informative. The latest additions are: to increase the connectivity between the trader and the market – Alert!Fx and Wireless Web. MG’s Wireless Web allows traders to interact with critical data such as forex quotes, news, and information from the leading forex market maker in the industry. Alert!Fx offers rate alerts, news alerts, margin alerts and customized alerts via any wireless method, from cellular phones to pagers, and from Palm Pilots to e-mail.
A different group of trading systems is the group helping to make investment decisions and allocating the funds for you. Investor’s Edge, Global Asset Allocation and Mutual Fund Family Asset Allocation – are the examples if this group. The goal of the systems is to provide Fund distributors and their sales representatives the ability to create asset allocations for customers wishing to diversify within one Fund. It enables to create asset allocations for any group of mutual funds from various fund families.
Now, that we have looked at all these trading systems and know that there are so many of them, it makes it even harder to make a choice, as to what system will bring you most profit. A good trading system is objective, consistent and dependable. A trading system, by definition, is comprised of specific signals, operationally defined, combined with a set of evaluations and risk-management rules designed to make trading objective and mechanical-by which is meant: a system which can be performed in an impersonal, machine like manner; automatic. A system should generate buy and sell signals that can be placed as orders through a broker. With the recent expansion of online trading, many day-traders are now able to sit in front of their computers all day waiting for signals, making numerous trades all with the click of a mouse. Others prefer to hear a broker’s voice on the other end of the phone – but you should notice that regardless of one’s personal preferences in filling orders, the signals which a system generates must be carried out; a broker or anyone else should not talk you out of following through with your system.
Trading systems are not however too popular in the Ukraine, for several objective reasons. First, the trading field in our country is now on a very early stage of the development, and does not attract much interest in Ukrainian people. Also our people do not invest in things like that, as there is nothing to invest really and also the information exchange is not at the most high level either, I mean the Internet. But let us see, what can be the perspective popularization of trading systems in Ukraine. First and the biggest trading system in Ukraine is PFTS, it is the trading system that gives Ukrainians the possibility to trade both domestic and international stock, futures, options and currency. It is easy to use, however quite expensive to install and to use; Internet is still very expensive service in our country. A big potential for the development of trading system, is the absence in the investing objects in Ukraine that are risk free. The logic is, why to invest in bank, if that does not give you a risk free guarantee for your investment and offers little interest, better to invest in a risky stock trading and get a huge return. Also the growing Internet usage in our country gives the possibility to be updated fast with the necessary trading information.
I will add in closing that an added benefit of systems trading is the potential for diversification that it offers the uninformed investor. For example, a doctor with plenty of money but no time to learn or actively trade futures would do well to allocate a certain percentage of his investment portfolio to a futures trading system. He would also be wise to allocate a certain percentage to mutual funds, real estate, bonds, and so on.
Diversification is the golden principle of trading management. And no trader should neglect the tremendous opportunities inherent in the futures and commodities markets.