Introduction to Stock Trading Strategies

When trading stocks using technical analysis investors have various stock trading strategies that they will use. Stock trading strategies are in an essence, stock trading systems that are designed for use in the stock market. Your trading strategy should specify the conditions necessary for entering and exiting trades, and should contain risk and money management as well.

Through studying market conditions investors can implement a strategy and a trading plan that works for them. Doing this will help the investor to not only make educated trades, but will help the investor to keep emotion out of his or her trades. The trading strategy can be tweaked and fine tuned in order to stay in line with any new market conditions, however, investors must be sure to stick with their trading plan and strategies as much as possible.

A trading system (TS) actually represents a set of instructions which advise opening or closing trading positions based on the results of technical analysis. A trading system allows excluding randomness in the trading process. Strict adherence to the system permits to rule out the emotional factor in the trade. For this reason, one must follow all recommendations of the system strictly even if for all that a potentially profitable position will not be opened.

The goal when implementing stock trading strategies is to maximize profits while minimizing risks. A part of doing this is determining the risk tolerance level that is acceptable to each investor. Through analyzing risk tolerance, the investor is then able to determine the optimum number of shares to be traded at a given time, as well as again their entry and exit points. When determining this, investors must take into account that fact that the greatest investment risks usually turn the greatest profits while the smallest risks typically turn small but long term profits. Each investor must decide individually what works for them.

The first thing you need to do when creating a trading system is to select time periods, or working timeframes, you will work with. A lot of restrictions in this respect come from the starting deposit and principles of capital management. Long-term periods are accompanied by lesser "financial noise" than shorter periods. Technical analysis performed for long term periods is more accurate and provides a lesser number of false incitements. Long-term periods are preferable in terms of successful working, but, however, they require a larger starting deposit. Shorter timeframes are characterized by greater noise, but, hence, the technical analysis is less accurate and gives out more false signals.

In cases of a modest starting deposit, it is not recommended to direct one’s attention in trading to long timeframes, it is better to try medium and short ones first. On longer time periods price fluctuations are not as evident, but, in fact, these fluctuations may be significant enough so as to "eat up" the entire starting deposit. Thus, the first restriction for the trading system is the starting deposit that determines the choice of the working timeframe. Please bear in mind that the settings of analytical instruments for each of the periods are to be selected individually. Besides, if performing analysis for short timeframes, the requirements to the analytical instruments have to be as exacting as possible.

The second task of the trading system is to define the entry point with the help of technical analysis. In any TS, irrespective of analytical instruments, the analysis must be started from a large timeframe and pass gradually to shorter ones. The first thing to be defined is the current market conditions as a whole.

For instance, if our trade is guided by the trend, we first determine the global trend. Even if a signal to buy comes at the time of a downward trend, a position should not be opened in such a trading system.

After that, the market conditions for periods of lesser order are analyzed. Eventually, the working timeframe is analyzed. If there appears a signal confirmed on long timeframes, one can open position immediately. However, to define the optimal entry point one can perform additional analysis on shorter timeframes.

The most important task of TS’s is to determine the exit point. Any system must provide not only the signal to open a position, but estimated levels of profit, as well. Order Take Profit should be placed next to this level. It is also necessary to identify the level of stop loss for the case when the market starts to move in an opposite direction. Place the Stop Loss order at this level. In other words, the TS must define exactly, up till which level the position should be held open in order to receive maximal profit, and define mechanisms for loss stopping in case of an unfavorable development of the market.

Successful traders always have one rule that is a part of their stock trading strategies. That rule is that they have their stock portfolio divided three ways. They divide their portfolio into percentages in which they are seeking a predetermined percentage for high risk, high return stocks, and predetermined percentage for medium risk, medium return stocks, and a predetermined percentage for low risk, and low return stocks. The percentage will vary for each investor however keep in mind that if an investor has the bulk amount of their available funds in high risk stocks, they should seriously reevaluate their portfolio as this is considered very risky.
Another trading strategy to consider is stock screening. This strategy is when the trader screens the entire world of securities for possible favorable stocks to trade. Many traders will use moving averages in their screening method which is a very simple technique that is most suited for markets and stocks which will trend well. Other stock traders will look for stocks that are ready to breakout from a pullback.

One more simple but effective strategy is Pyramid Scheme which includes three points that actively work together in order to make all individuals successful in trading stocks.

Step One: Keep your number of targets small and make sure you don’t set your expectations too high. For example, you feel that a safe and profitable stock investment would be in snack foods. So, you decided to pick the market leader in snack foods NOT the snack food company with the highest prices to trade stocks. This ensures success for the long-term and not just a get richќ fast strategy.

Step Two: Invest in growth industries, one in which will continue to grow for hundreds of years to ensure that you receive a high return on your investment. For example, let’s say that you own 1,000 stocks in a pet food company. It is logical to say that pet food itself is a growth market; however, the particular company in which you bought shares may go out of business tomorrow. So, you decide to trade your shares for a more stable type of business, such as computers. Because computers are the way of our future, it is logical to sell your 1,000 shares in pet food and purchase 1,000 shares in a computer company, such as Dell to ensure growth on your initial investment.

Step Three: Invest in market leaders, companies that seem to have a monopoly in their industry, even if their stocks seem over priced. For example, Microsoft has dominance in the software industry to the point that they are in no danger of losing their market dominance, which simply means more money for you if you choose to invest in a company such as this.

With the Pyramid Scheme you can rest assured knowing that all three of these simple steps work together to form a reliable strategy in which to work with in order to trade stocks.

Another equally as effective strategy for trading stocks is known as the Basic Strategy in which you vow to invest in an even number of shares in an even dollar amount. The reason you must invest in an equal number of shares is because no one can accurately predict which stocks will increase in value, therefore, you are investing on emotion. For example, Stock X is priced at $100 per share so you decide to purchase 10 shares for $1,000. However, Stock Y is only $40 per share, so you decided to purchase 100 shares for a total of $4,000. In the meantime, Stock X goes up $10 so you have just earned $100, but Stock Y goes down $2.00 so you loose $200 which means you are in the red $100. Therefore, you must trade in Stock Y for more of Stock X in order to make a return on your investment.

There are thousands upon thousands of stock trading strategies currently in use, some are free and some you must purchase from certain companies claiming to have the way to make a 1,000% return on investment. It is totally your choice as to what strategy, if any you choose to incorporate into your stock trading. The healthiest advice toward stock trading strategies is to always use your common sense when dealing with your money.

Related Posts Plugin for WordPress, Blogger...

3-column blogger templates(available in 4 different styles)