The Advantages of Mechanical Stock Timing Systems

Stock trading can be an interesting diversion, a hobby with facets that are always changing and involving, or it can become a serious and dangerous obsession similar to gambling addiction even though most investors never do more than dabble with trading.

One of the most important impediments to becoming a systematic trader is overcoming the emotional aspects of trading.

Buy High, Sell Low?

The trouble with trading without a system is that the market entices trading at exactly the wrong times. More precisely, human nature, when applied to normal market dynamics, leads to buying high and selling low, exactly the opposite of what is necessary to profit from stock trading.

Why is this? Unfortunately, we human beings react more negatively to losses than we do positively to wins. Numerous psychological studies show that our emotions are difficult to control when we risk something of value. On top of that, we have a tendency to extrapolate current conditions and expect that they will continue.

So, when we buy a stock and it goes up, we believe, emotionally, that we made a great decision and it will continue to rise. Thus, we don't sell after it has risen. However, if the same stock goes down after we buy it, we believe, emotionally again, that we made a mistake and it will continue to fall in price.

So, naturally, we sell the stock before it goes down more. So what happens in both cases? We sell when a stock falls but hold on when it rises. Once the rising stock falls, we sell it. We have bought high and sold low because we didn't have a system in place to check our emotions at the trading door.

Unemotional Trading

The chief advantage of a mechanical system is the possibility to put emotions to the bottom of trading criteria. Since we have a plan, we can buy and sell without getting caught up in the emotional roller coaster that normally happens in trading.

A good mechanical system can give us confidence to trade and take our gains and losses in stride.