Stock Market Risk Algorithms Can Screw You

Stock market risk algorithms are impressive! Right now I'm not discussing high frequency trading or black-box trading.

The stock market risk algorithms I am speaking about is employing a PC to determine what stocks to buy and when.

Exactly why is this so great?

It altogether removes the factor of emotion from your trading stocks.

The algorithm tells you when to purchase and when to sell established on the movement of the stock. In such a scenario, you are responding to what the market is doing as opposed to your individual feelings, emotions, and dispositions. There are actually a group of rules and those rules are always applied. Greed and worry is superceded by objective rules and math worked out by a personal computer that doesn't have prejudice.

Exactly what I do not like are stock market risk algorithms that are preserved secret or concealed from the trader. Because of this situation, trading with these results in being more an emotion of "trust" in the system rather than in the computational strength of the algorithm as it is used to effectively predicting future price motion in a stock or market.

These kinds of black-box algorithms are fads that come and go as a sufficient amount of traders ultimately abandon that losing strategy.

You should always know what a computer algorithm is doing because you need to know what modifications have to be made to the algorithm at a variety of times when it stops working as expected. In the event you are not aware of what aspect of the algorithm is failing, how can you make the alterations necessary to bring it back into line.

My favorite stock market risk algorithm employs a point system and calculates: the last hour close relative to the 5 hour moving average, any 3 day lows or highs made, the last price compared to the 20 day moving average, any 3 week lows or highs made, any 3 month low or highs created.

The algorithm then turns into a time saving device only which is the correct arrangement to have between stock trader and algorithm. Quite 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 every single day.

As stock traders 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.

by: Michael Scott..

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