There is a lot of nuance to the stock trading market, so developing a strategy early on is a must.
However, there isn’t only “one way” to successfully trade and see returns on your investments. Many experts have their preferences. Here’s just a few stock trading strategies and their positives/negatives.
Many traders should start by paying attention to the markets every single day. Beginner traders often start by buying and selling securities on the same day. In this case, positions are closed out the same day they’re taken, with no position being held overnight.
Pros: There aren’t any risks with holding a position overnight, as traders close out their trading positions before the close of each day. This means there’s no need for concern that something will cause the market to open lower or higher the next day.
Cons: Overnight events that can cause gaps up or down in the following day can be very profitable for traders who choose to hold their positions overnight.
Matt Choi, a professional trader and the founder of Certus Trading, a trading education company, has more than 17 years of experience trading in the markets. In a review written by finetunedfinances.com, Choi places emphasis on the idea of developing a “trading personality.” Trading personality refers to the approach a trader develops to be successful.
In an interview with techcompanynews.com, Choi said: “You have to lay a good foundation and build up your knowledge. I’ve met and worked with a lot of tracers over the years, and those who have shiny-object-syndrome never succeed.”
Swing traders get into it when a trend breaks in the trading space. When a trend is at its end, this usually means there’s some price volatility as a new trend tries to establish itself. Traders who utilize the swing method buy and/or sell as that price volatility sets in.
Swing traders are usually held for more than a single day, but for shorter periods of time than trend trades. They often create a set of trading rules based on fundamental analysis. These rules are designed to help identify when buying or selling a security.
Pros: Not as much time is needed to make profits on swing trading and allows you to make a greater profit on a single trade.
Cons: Because swing trading is less active, it may be perceived as “less exciting” than its more active counterpart. They may also only catch parts of trends and experience greater losses.
As American billionaire Investor Charlie Munger once said: “Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”
Active traders often use scalping as one of the quickest trading strategies. It involves identifying and exploiting bid-ask spreads that are wider or narrower than normal due to imbalances in the supply/demand. A scalper capitalizes on smaller moves that occur in higher frequency, with measured transaction volumes. The level of profit per trade is small, so scalpers tend to look for liquid markets to increase the frequency of their trades.
Pros: Scalpers don’t tend to get caught in reversals and their percentage of successful trades is often higher.
Cons: It’s necessary for a scalper to have keen trade precision to avoid big losses on smaller gains. They also may find themselves drowning in too much noise in the markets.
According to neoadviser.com, Choi said having a plan is a must before starting any trade.
“It is absolutely crucial to have a plan before getting into a trade. In fact, I don’t know any successful trader who trades without a plan. Period,” said Choi. “I get into every single trade knowing exactly when I will take profit, and if I am wrong, when I will take a loss.”
These are just some of the common trading strategies in the markets and certainly aren’t all of them. Developing a trading style takes time and practice, and with a little knowledge on the potential risks and benefits, anyone can find success.