Stop Relying on the News Media to Dictate Your Stock Trading
The following is adapted from Automated Stock Trading Systems by Laurens Bensdorp.
If you trade the way so many traders do, mostly in long positions, your investing life effectively is led by the news. Something happens in the world, so you turn on the TV or pick up the paper and hear that “this is a dangerous environment” or “traders have to be careful now.” You pick up your phone and are bombarded by messages about the market.
This situation creates an enormous amount of stress, anxiety, and insecurity, because you are receiving all of this conflicting information and you don’t know what to actually do about it.
Really, what are your choices? Everything that you see on the news is already converted into the price of a stock. If you want to trade according to the news, you’re already too late.
You don’t need to watch or read the financial news.
It’s a wonderful feeling, because you don’t stress out about what’s happening. You don’t have to rely on people who contradict themselves from one day to the next.
A New Approach to Trading
The best thing I ever did was to stop reading and watching the financial news. It was so good for my psyche. I can rely on the statistical power and knowledge of the reliability of my systems. Before I did this, if I had a long position in the market, I was glued to the television or my phone.
I would be worried about a potential downturn. If I started hearing news about a possible downturn, my stress went through the roof. What should I do? Should I sell? Should I stay in? What’s going to happen?
It was awful, and it didn’t help my trading.
The trading systems you will build ignore the news. They are based on price action. We look at the historical price development of stocks and, based on that, we can define a buying decision and a selling decision. We quantify when to buy and when to sell. When you can quantify something, you can turn it into a computer program.
Then you can test whether your approach has a statistical advantage — an edge that tells you it is statistically valid to buy or sell at a certain point based on the previous price action. When you know you have an edge, you can let the computer decide what to do based on the price action. Not based on the news. Not based on the talking heads on television. And, critically, not based on emotion.
Emotion-Free, Statistics-Based Trading
This approach takes the emotion out of trading. Once you’ve built a system you believe in, the computer does the heavy lifting, calculating what to buy, and when, and what to sell and when. Let’s say you’ve developed a long-term trend following system.
You know the market conditions, when it will make money. And you know the conditions when it should lose money. Losing money is normal, and you understand that, so you don’t worry about it, because when you make money, you make more than you lost. That’s the edge in your system.
Most of what is on the news every day is about fundamental investing — about looking at what the market will do. We build our quantitative systems by looking the other direction — at what the market has done.
There’s no statistical evidence for what the market will do, and so no comfort there. Trading where you have an edge and statistical evidence for it takes a lot of the emotion out. You have statistical evidence of what your maximum drawdown is likely to be, what your returns are likely to be, and you can be confident in that.
For more advice on effective methods of stock trading, you can find Automated Stock Trading Systems on Amazon.
Laurens Bensdorp is an expert at combining multiple non-correlating trading strategies to achieve a high risk-adjusted return regardless of what the market does. He shares that knowledge with a group of brilliant and dedicated students in the exclusive Elite Mentoring Program that’s part of his Trading Mastery School, of which he is the founder and CEO. What Laurens has found is that teaching has helped him exponentially grow his skills as a trader. Author of the bestselling book The 30-Minute Stock Trader, Laurens has lived in eleven different countries and travels the world as he pleases. He currently resides in Spain with his beloved wife and children.
