I think you will agree, building a winning stock trading system is not easy…
And deciding whether to run your system on 7,000 potential stocks or on Exchange Traded Funds, is a question only you can answer.
But you can radically simplify your approach
Over the years I have been continuing to develop my various stock market system and I have had somewhat of an epiphany. I do enjoy trading stocks and I have a wealth of Stock Screening technology setups to help me find and target the right stocks at the right time.
I have spent a long time developing them. Some of my systems use exotic indicators such as Keltner Channels, Ichimoku Clouds, Wilders RSI and even Bollinger Bands. Some setups are a lot more successful than others. But none are absolutely perfect. Most of them generate positive returns, if they didn’t I would scratch them.
1 – Challenges with Automated Trading Systems
One of the challenges with automated trading solutions is the volatility of stocks. When fear and greed creep into the market especially on an individual stock level, the variations in stock price can be huge. When Earnings season is upon us, there will be plenty of announcements whereby the stock will fluctuate between 5% and 10% within the day.
Systems do not deal with earnings season well because the trend can be turned upon it’s head within minutes of the announcement. I am not complaining, I have had my fair share of trades optioning a volatile stock just before an announcement and banking a 100% return within the day. 100% returns are possible if you option a stock via a Call or Put and the stock moves 10%, typically magnifying the gain or loss between 8 and 10 times. However, I have taken large losses on those types of bet also.
Trading individual stocks on a medium to long-term strategy does take a lot of time investment and you typically have 50% winners and 50% losers. The profit is actually in the average gain versus the average loss per trade. If you can move the win ratio in your favor then even better.
An Epiphany on Stocks vs ETF’s
The eureka moment came to me when I applied one of my simple price based systems to the market indices and realized that if I utilize it here I would have a lot fewer trades and better long-term growth.
My thoughts are essentially this. The overall market direction is easier to interpret because the indices move slower and they aggregate the overall market consensus and not just the emotions of investors in a particular stock. My system has been consistent enough over the past 25 years for me to trade it live.
I will not share the yearly percentage return of such a system, suffice to say it beats the market. At the end of the day that is what we all want especially as 90% of fund managers fail to do so.
I will lay out my arguments for why trading global indices via exchange traded funds versus trading individual stocks is something you should consider.
2 – Company Information Overload vs. Manageable Economic Data
With thousands of individual stocks trading on most stock exchanges, keeping up with the news flow can be a challenge. Even if you have honed your watch list down to a handful of 20 or so stocks of interest, maintaining a good grip of the fundamentals, market climate and industry developments can be a full time job.
If you fail to spot something important you could miss a significant trend changing development.
Conversely, stock market fundamentals such and interest rates, retail sales, fiscal policy, monetary policy and inflation are all managed and are relatively slow to change. This gives you time to evaluate the impact and the market sentiment as a whole.
3- Stock Volatility vs. Index Stability
We all know that stocks can be extremely volatile.
Of course, micro cap and small cap stocks are the most volatile over the short term.
But large caps and blue chips can also devastate a portfolio’s total yearly return over time.
That is not to say that you cannot lose money investing in an index exchange-traded funds (ETF), however the short term losses are much less.
For example, I am sure that stocks you own may lose 3% to 5% in a day on a fairly regular basis. If a major index loses 5% in a week that is a sign of a major stock market shock.
This is what I call a shock event warning in the book “How to avoid the next stock market crash”.
4 – Time Hog vs. Time Well Invested
Using techniques taught in the Liberated Stock Trader PRO training it is fairly straightforward to create a system that can evaluate the overall stock market direction.
Investing in the market during bull markets and selling your ETF’s when you are in a confirmed bull market can save you a lot of time s the major market turning points are years apart, as opposed to months apart for some stocks.
That means fewer trades and more long-term accumulation.
The only problem here is you need to understand what is a major turning point.
5 – Fast Gains vs. Slow Gains
There is no doubt about it, purchasing individual stocks and seeing them win is a good feeling. But seeing them lose is very painful especially when they turn around and sell off just hours or days after you purchased them. The slow gains of the stock market indices I believe are not as satisfying as the quick gains in stocks, but they can be in the long term more profitable.
Witness the 250%+ rise in the S&P 500 from the bottom in 2009 to the all-time high in September 2017. That is an annualized 21% return. That is in the league of Warren Buffet. Even the best of day traders do not make that kind of return in a year, and they do it full time.
Let’s imagine you only re-entered the market in June 2010 missing the start of the new bull market your would have still made 64%, annualized at 12% per year. They are good returns.
6 – Fast Losses vs. Slow Losses
Those dealing in Options can tell you that the gains can be great but the losses also, it is a numbers game. But even trading in stocks can be a volatile experience. Alternatively, major negative market changes are slow to catch on as the millions of market participants go through the emotions of shock, denial and acceptance. This is in your favor and it gives you time to act.
7 – Technical Analysis Applies
Technical Analysis Applies to markets even better than to individual stocks. Rather than having to apply short and long-term stochastics to an intraday chart for a specific stock you can focus on the big picture. Using price based indicators to assess if the market is in a major up or downtrend. I have provided countless lessons in evaluating the direction of the stock market on this website and in seminars.
If you what to reduce the emotional roller coaster ride that is investing in stocks, you can settle for longer-term “boring” gains and invest in indices.
I would like to hear your feedback on this article so please leave a comment or a facebook “like” below. I will try to respond to each comment.