Using Data Analysis to Manage Risk

Using TradeStation, you are able to monitor price and study historical data as well as apply studies that will visually illustrate what the market is or has been doing, and that will ultimately alert you to buy and sell opportunities. Data analysis is an excellent tool to help you prevent losses by monitoring price activity, as well as to alert you of sudden changes or developing patterns that affect your decision to buy into or exit a market.

Monitoring Market Activity

Analyzing data to determine patterns and identify sudden price moves can greatly assist you in making educated and quick trading decisions. For example, let's say you own several hundred shares of a corporation and the stock has been enjoying a consistent rise in price over the past few months. You have created charts, you are following its price activity, and you have applied specific studies chart that will help you determine any shift in market direction.

That same corporation then publishes its fourth quarter earnings report. The report shows that earnings are down. News headlines says the corporation is predicting a loss for the financial year. Over the course of the next week, the studies you applied to your chart for this corporation indicate a definitive downturn in price activity. The falling price, along with the quarterly earnings report and headline news, may indicate a downshift in market direction which could mean a loss to you. By continuing to collect and analyze the data on your chart, you will be able to make more informed decisions as to when to exit that market before you incur a loss.

Data analysis is also useful in analyzing what economic or other factors occurred at specific points in a market's history that may have influenced a particular price move. This enables you to monitor that market for similar occurrences today and in the future that may cause the same price move.

In addition, monitoring markets can help you determine whether or not it is a good time to enter a market by enabling you to study past performance along with current price activity. Studies provide a great way to compare a market in which you are considering investing with other markets in the same industry-or with other markets that impact that particular market.

These are just a few ways in which data analysis can assist you in monitoring markets to reduce and manage financial risk. As you begin to learn how to use the vast selection of studies available in TradeStation, the benefits of data analysis in reducing financial risk will become even more obvious.

Using Data Analysis with Trading Strategies

Trading strategies provide an invaluable method by which to control losses. They do this by automating the decision process for entering and exiting market positions, and by using the concept of stops to minimize losses, and/or to ensure profits.

Trading strategies can contain criteria that will exit you from the market based on any profit and loss factors. In other words, the exits are driven by your money management criteria, not by market conditions. For example, you can exit when you lose a certain amount of money, when you've given back a specific amount of your open position profit, or when you've reached a specific amount of profit.

You can test your trading strategies without risk by applying them to past market performance in order to determine whether you would have made or lost money, as well as the types of markets (up, down, or sideways) in which the trading strategies would have performed best. Trading strategies help to remove the emotion of trading and greatly help in the decision-making of when to enter and exit, which gives you the best advantage toward profitability.