Stock Market Risk Algorithms Can Screw You
Stock market risk algorithms are awesome! Now I’m not speaking about high frequency trading or black-box trading.
The stock market risk algorithms I’m referring to is using a PC to choose what companies to buy and when.
Why is this so great?
It thoroughly washes away the aspect of sentiment from your investing.
The algorithm notifys you when to purchase and when to sell based mostly on the movements of the stock. Within this circumstance, you are responding to what the marketplace is doing instead of your individual feelings, emotions, and dispositions. There are a collection of rules and those rules are always applied. Greed and worry are replaced by objective rules and mathematics determined by a computer that doesn’t have prejudice.
What I do not like are stock market risk algorithms that are held secret or concealed from the trader. Within this situation, trading with these turns into more an emotion of “belief” in the secret method than in the computational potential of the algorithm as it is utilized to effectively forecasting future price direct in a stock or market.
These types of black-box algorithms are trends that appear and vanish as enough traders finally abandon that losing strategy.
You should always know what a computer algorithm is doing because you must know what changes have to be made to the algorithm at various times when it stops working as you expected. If you are not aware of what element of the algorithm is failing, how can you make the modifications needed to bring it back into line.
My favorite stock market risk algorithm works by using a point system and measures: the last hour close relative to the 5 hour moving average, any 3 day lows or highs made, the last price relative to the 20 day moving average, any 3 week lows or highs produced, any 3 month low or highs produced.
The algorithm then turns into a time saving system only which is the appropriate relationship to have between stock trader and algorithm. Put simply, you could do the calculations for yourself but it would take much longer. You could do 10 stocks a day, or use a computer algorithm to do thousands of stocks each and every day.
As investors we have 3 possible positions we can take at all times: (1) We can be long the market (2) We can be short the market (3) We can be on the sidelines and out of the market.
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