Is it a good idea to let a machine do the stock picking? It is no bad idea, but it could be done better. A machine is good in picking the entry spot and determine the exit. In other words, it can trade, buy at the right time, sell at the right time, statistically of course. Swing trading, as in flipping from long to short, is the robots bread and butter occupation.
Picking a stock requires more insight than a machine has. You want to understand the bigger picture, what is behind a stock, and where the economy may be headed.
That’s even true for technical traders. They want to minimize the risk for surprises from the fundamental side. For instance, it is a bad idea to pick pharmaceutical stocks and trade them technically. Every now and then these stocks like to drop overnight like a stone, because of some adverse decision of regulating authorities.
So, the stock picking robot is an illusion. Better is the human trader in making the actual picks. The trading process itself can be mechanized then. This is especially for traders with psychological trading problems a good idea.
You are not one of those poor souls?
Wrong! Every trader has mental trading problems, some are just not aware of them and others don’t admit them. That’s probably one reason why our subconscious is fascinated by trading robots.
This fascination spills slowly over to the stock markets. Traditionally Forex is populated by robots. At least the small trader thinks so. The problem with Forex is that there is nothing to pick. A robot in Forex can only trade and it will happily do so until it has busted your account with one final losing trade after playing the martingale or something similar.
Most Forex robots have the money management built in. That’s something the human trader with his better oversight should do. Forex robots are often capital smoking monsters:
They can’t pick, because they don’t understand the world and because there is nothing to pick from in Forex.
They can’t trade, because Forex is mostly random with some nice but ultrafast trends where there brokers don’t let the robots in. At least not at a favorable price.
They also can’t do a sensible money management, because they want to be sold and they have to present a stunning hit-rate in the first weeks. The buyer of a Forex robot will only find out later what a self-destructor his robot is when it is too late for a refund.
With stocks this is all different. Money management and the actual stock picking is done by a human investor and the machine takes the trading part. At its best the outcome is trend stock picking.
How to do it exactly?
The money management is much more simple than people think. We can summarize it with about two rules. Don’t go short and don’t trade on margin. Split your trading capital into at least a few positions.
The stock picks could come from the Zen Trader, for free. Just subscribe to our blog (RSS icon in the header).
The trading could be done by this fearless swing and short-trend trading automaton. It works actually like a human mind, as it is designed as a neural net, a self-adapting algorithm that detects patterns that are even hidden to the eyes of really good traders. It is also cold as steel.
Try it! The combination of human insight for the bigger picture and machine intelligence for the price details is the revenge of the small guy.