Choosing A Stock Trading Strategy

A stock trading strategy is personal like a style of dress, a way of talking, or a taste in food. No one can tell you one stock market trading strategy is the best stock trading strategy; you need to find what is best for you. What works for someone else may not work for you.

Read through the following strategy overviews and ask yourself the following questions:

  • Will I be able to follow this strategy even if I don’t like the stock?
  • Will I be able to keep up with the information required to run this strategy?
  • Do I have the time or attention span to focus on this strategy to the level that is required?
  • Can I handle the volatility that is inclusive with this strategy?
  • Do I have the money required to invest in this stock trading strategy?

Stock Investment Strategy

One stock trading strategy is also a simple investing strategy. This investing strategy generally involves looking at business financials in combination with general economy indicators to determine which stocks will do well.

If you wish to look at this from a trader’s mentality I would focus on the mechanical investing strategies. These involve using back testing to determine which indicators you wish to use and then buy and sell based on the trigger points. The information and the purchases in this case only need to be updated as new information is available, which is generally quarterly or even yearly.

The advantages to this approach include lower volatility, lower monetary investment required because of the high win ratio, and a lower level of attention needed to monitor the investments. The major disadvantage is if you design your strategy poorly your returns could be mediocre with a lot of time wasted.

Stock Trading Strategy

True stock trading strategy is generally broken down by time frame. The more you reduce the time you hold a trade the less risk you are introduced to by the factor of time. Time allows more potential for unexpected results. The advantage to longer trading time spans is less impact from trading commissions and mental stamina. One extreme leads you to instantaneous trading completely executed and determined by a stock trading software on your computer. The other end of the extreme is buy and hold investing as talked about earlier. Where you fit in as a stock trader comes down to your comfort level with the questions above.

Keep in mind that even though online penny stock trading often involves a quick turnover it still involves risk. Because of the nature of these stocks they hold a higher risk even though they aren’t held for very long.

Chart Pattern Strategy

Chart patterns are a pictorial representation of the price change of a stock over time. The purpose is to visually see common stock patterns that may be more difficult to notice with a mathematical equation. Investors tend to follow a predictable pattern in certain situations. For example, the double top is a popular chart pattern. When you see a chart that hits recent high, falls, climbs again to near the same high, but not quite as high, you can expect to see the stock fall. Essentially what happened is investors rode the price to the high and some took their profits. Then when the stock fell some traders jumped in for the ride back up. Then as the price began to climb again more investors decided to jump out. This just screams weakness to the rest of the share holders and more will begin to jump out.

One thing to be mindful of with this approach is that it can be easy to make up patterns, sort of like looking for images in clouds. For more on reading stock charts read my article: How To Read Stock Charts

Swing Trading Strategy

Swing trading is based on the price movements up and down around the general direction of a stock movement. Say a stock is generally climbing. Over the short term a stock may climb a little too fast and have to fall, other times it climbs too slow and then rushes to catch up. Swing traders recognize the short term oversold and overbought stocks using tools like resistance and support points, Bollinger bands, and Fibonacci numbers to make quick profits on the short price corrections.

Finding a stock trading strategy that works for you based on the questions above will help you achieve greater success and it will help you enjoy the process more. Don’t try to force yourself into an approach that just isn’t right for you or it may not turn out the way you wanted.