MONEY AND INVESTMENT
SYSTEMS FOR FOREX AND STOCK MARKET TRADING
Any one who really follows these markets knows that the underlying prices can fluctuate, often violently, due to changes, and equally effectively due to rumors about changes in various factors. These factors include not only the company and sector-specific conditions, but also economic and geopolitical as well as the general market environment.
A viable system for trading the markets, while based on a solid mathematical foundation, has to be fully flexible to take into account these unforeseen events. It should be designed to incorporate the latest possible information, and the support system should also be flexible and continuous. There should be a provision to correct a wrong move before it becomes too expensive. Thus a system that sells on the assertion that the yellow brick road will take the buyer of the system to the desired destination as long as he or she follows the buy and sell arrows, is misleading unless the destination is entirely opposite of the original intention.
There are two major types of market analyses - fundamental and technical. The former analysis relies on the company’s earnings per share, price earnings ratio, growth adjusted earnings, dividends, and forecasts of one or more of these measures as well as on the general market and economic conditions including interest rate environment. A technician, on the other hand, watches moving averages, relative strength indicators, cumulative distributions, stochastic measures and host of similar factors. However, the market conditions may occasionally prove some or all of these measures to be somewhat irrelevant.
An example of where the audience are misled by the aggressive sales people of such systems is the way they describe their presumably sound method of controlling the losses. The advertisements claim that you can never lose, for example, more than two percent in any trade when you put your stop loss limit at two percent below your purchase price. As explained in the following paragraph, the concept is not that simple in practice.
Let us say you buy one hundred shares of a stock at a price of one hundred dollars each, and put a stop loss limit of two percent below the purchase price. This means that the stock automatically sells at the market price when its price decreases to ninety eight dollars or less. If the stock price gaps down to eighty dollars, which is very likely in any of the markets, it will immediately sell at a price of eighty dollars or less, resulting in loss of at least twenty percent, and ruthlessly reducing your original investment of ten thousand dollars to eight thousand dollars less commissions.
It is good to remember that past perfomance is not indicative of future results, and while there is potential for huge profits, it is also possible to lose money in each of these two markets.
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