Systematic Stock Trading Methods

by Angela Ogunjimi

Systematic stock trading methods are among the many methodologies that traders utilize to automate buying and selling strategies. The methods rely on reasonably objective indicators, such as market trends, analyses and prices. Systematic trading attempts to avoid the hazards of other stock trading methods, such as discretionary or reactionary approaches, which can sometimes be faulty because of human error, greed, news reports and other influences. On the other hand, pitting man versus machine doesn't guarantee a win. Systematic trading has been criticized for creating market volatility. Systematic trading is sometimes called "algorithmic," "process-driven trading" and “black box" trading. Computers can model and make systematic stock trading decisions for you, but the concept dates back long before the arrival of computerized systems in the 1970s.

Trends

One of the most common methods used in systematic stock trading is moving averages. Computed in a variety of ways, this technique watches the trends and relationship of two moving averages of prices. It tracks, for example, when a price moves over a buy-or-sell signal line, as well as when prices significantly rise, diverge or converge.

Statistical Arbitrage

Statistical arbitrage, also called StatArb, attempts to take advantage of price differences of the same asset in different markets. Mathematical modeling techniques help identify when the conditions are ripe for this opportunity. The trading capitalizes on this imbalance, and many times, the price differential between the two assets is equal to the profit made on the trading. Although touted as risk free, statistical arbitrage caused headline-making losses in hedge funds in 2007, according to the Wall Street Journal.

Channel and Volatility Breakouts

A price channel envelopes the trend of prices for a stock or commodity. When graphically displayed, you see the average range of changes as the price goes up, down or stays relative in the middle. Systematic methods identify a trade opportunity when prices pass over or "break out" of the trend lines. A similar technique traces trends in volatility. For example, it can be used to determine when to enter a market based on when it moves a specific amount from the open and the previous daily ranges of the market.

Time

Many traders use quantitative methods such as price movement and volume to determine entry and exit signals. In some cases, time-based solutions work just as well. These methods run the gamut from time-of-day to day-of-week trading and they work by noting consistency in performance of stocks at certain times of the day and how well that consistency holds up over time. Time-based methods may also take advantage of certain tendencies, such as trading up on Mondays. These techniques are said to help optimize exits for profitable trades which if made minutes later would have resulted in losses.

About the Author

Angela Ogunjimi has been a prize-winning writer and editor since 1994. She was a general assignment reporter at two newspapers and a business writer at two magazines. She writes on nutrition, obesity, diabetes and weight control for a project of the National Institutes of Health. Ogunjimi holds a master's degree in sociology from George Washington University and a bachelor's in journalism from New York University.

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