Are you looking for ways to trade stocks and increase your profit potential? We have created this guide to help you understand the most common stock trading strategies.
Having the best trading strategy helps you come up with the best plan for stock trading. However, to effectively utilise a stock trading strategy, you must be fully aware of how it works and the impact of using it.
Before we start analysing top stock trading strategies, a trader needs to know what stocks are and all other information about trading stocks. So let’s begin by refreshing our minds quickly to ensure we are on the same page.
What Are Stocks?
Stocks are financial securities used to represent partial ownership of a business or company. Most traders refer to them as shares or equities, and owning them means that you are legally entitled to a company’s dividends.
Stocks are traded in stock exchanges where you get to access various stocks from different companies globally. They can also be traded on an online broker’s platform as physical assets or derivatives such as CFDs. Spread betting is also possible with stocks, making this asset a perfect tool for portfolio diversification.
Strategies for Stock Trading
Trading stocks online can be more interesting if you apply the right stock trading strategies. There are various stock trading strategies to choose from, especially if you are a novice trader. Like professional traders, you can also create your own stock trading method based on your market analysis.
That being said, below are the basic stock trading strategies to help you in your trades as you develop your skills. They can either work in short-term or long-term trades. Therefore, ensure you understand them fully before making a suitable choice.
- Day Trading
Day trading falls under the category of short-term stock trading strategies. Also referred to as intraday trading, it works by allowing you to buy and sell stocks within a day. Simply put, day trading positions should be closed before the day ends and earn profits from small price fluctuations.
The best thing about the day trading strategy is that it is flexible, and thanks to technology, you can place multiple trades within a day and benefit from small price movements. So whether you are always travelling for some reason or spend most of your time in the office, day trading is a perfect stock trading strategy for you. All you need is a mobile device for installing a broker’s app.
Since you will be benefiting from volatile markets, we can only say that day trading is a challenging stock trading strategy to master. However, with a broad understanding of how the financial markets work and skills to interpret the direction of small price movements, this strategy can be very lucrative.
- Swing Trading
Swing trading works the same as day trading. However, the only difference is that, unlike day trading that allows trading within a day, swing trading lets you hold a position open for days or weeks but not exceeding a month.
This strategy is relatively easier to master than day trading. For this reason, it is highly recommended to new stock traders. Using it on volatile markets allows you to make good profits without constantly monitoring your activities as day traders do.
Swing trading also requires market research by using a broker’s technical indicators to identify profit opportunities. However, this strategy falls short when it comes to fees. You will pay financing charges for positions left overnight, bringing about more trading costs than the day trading strategy.
The scalping stock trading strategy is also used in executing trades within a day. While most traders might confuse it with day trading, it actually differs slightly. Unlike day traders who trade for longer periods during the day, scalpers will only scalp the financial markets.
Scalping the markets means that positions can only remain open for seconds to minutes. In case it extends for hours, then it is no longer called scalping but day trading. Positions open for scalping strategy should also close within a day.
Scalping is for traders willing to take high risks by trading with a big account size. By trading with a high lot, you get a chance to earn huge profits should a trade work in your favour. Extensive market research and analysis are required to effectively benefit from this stock trading strategy. You should also guard your trade with risk management controls to help you mitigate losses.
- Position Trading
Position trading is a long-term stock trading strategy that is also popular among stock traders. With it, you get to buy stock and hold on to it for months to years to sell it for profit.
You will depend on fundamental and technical analysis to identify markets trends that last longer for you to have a chance at succeeding with this strategy. Simply put, technical and fundamental analysis helps you determine entry and exit points. It’s also easier for you to identify when to use risk management controls.
Do not mistake this strategy for investing purposes because whereas investing is strictly long-term, position trading allows you to benefit from both long-term and short-term positions. You also do not need to monitor your trades more frequently, allowing you to focus on other daily activities.
On the flip side, using this strategy means that a broker will hold your positions long-term, and you will be required to pay financing charges for overnight positions.
Trading Stocks With a Broker
Now that you understand the top stock trading strategies, you will need a broker to utilise them. Test the strategies on a broker by signing up for a demo account. Then, use them to practice stock trading as much as you can until you feel ready to trade in the live account and hopefully make a profit. You can then follow the steps below to trade stocks using a broker’s live trading account.
Create a Live Trading Account
You will need to create a live trading account that can earn you profits trading stocks. Stock brokers have varying requirements for you to start trading, so choose what best suits your trading requirements.
Select Your Stock
Once you’ve made the requisite deposit, a broker will provide access to financial markets globally. You will then choose which stock you want to trade. By using fundamental and technical tools, you will be able to thoroughly research the most suitable tradable stocks before making a choice.
Decide Whether you Want to Trade Physical Stocks or as Derivatives
When trading physical stocks, you are buying or selling the underlying assets. You can also trade stock by speculating its price movements and benefit from short-term opportunities. So, decide how you want to trade stock and which direction you want to focus on.
Pick a Strategy
After identifying the stocks to trade and the direction to focus on for that trade, you will have to choose a trading method that best suits your market analysis and research. Identify entry and exit points and do not forget to apply risk management controls. A stop-loss order will reduce the amount of loss to incur should a trade go against your trading plan.
Monitor Your Activities
It is essential that you keep track of trades after opening a position. This is primarily essential if you are using short-term stock trading strategies that are affected by short-term price changes. By following your trading plan, you will close your position at your set level and earn profits.
In case a trade doesn’t work in your favour, make sure you write down what hindered you from executing a trade successfully. You will afterwards analyse your results and make the necessary changes to improve your trading capabilities.
Stock Derivatives Trading
As mentioned in the text above, stocks can be traded as physical assets or as derivatives. There are two common ways to trade stocks as derivatives including:
- Contract for Differences (CFDs)
Stock CFD trading is whereby instead of buying stocks and owning the underlying asset, you will simply speculate on the direction of its price. Thus, your profit will be the price difference from when a CFD contract was opened to when it was closed.
Stock CFD trading is cost-effective than trading physical since you will not require funds for storing and insuring them. Additionally, you can either go long or short on a CFD position based on your trading plan or strategy.
One thing to note about stock CFD trading is that you get to trade with leverage. These are usually funds borrowed from a broker, which gives you more control over diverse stock markets. You can earn more profits with leverage trading should your trading activity work out as planned.
Remember that your trade can also work against you, and when it does, you lose huge amounts of money. So if you decide to trade CFDs, be prepared to analyse trading markets constantly and take advantage of short-term opportunities.
- Spread Betting
Like CFDs, spread betting lets you speculate on assets’ price movements and gain from short-term opportunities. However, what differentiates spread betting from CFDs is its tax treatment and availability in global countries. For example, in the UK, which is one of the countries supported, this trading method is tax-free. It is categorised as gambling.
Stock Trading Tips
While using stock training strategies can be beneficial in your trade, you need to be very keen and careful in managing your stock trading activities. Knowledge and news on stocks are some of the elements that give you the power to manage your activities. Additionally, it is important to conduct extensive market research to manage the risks of incurring losses.
Note that the above elements are essential in increasing your chances of executing a trade successfully. But are these enough in trading stocks successfully? Here are other important stock trading tips that you should know.
Being discipline with stock trading means that you need to create trading rules and stick to them. Suppose you tend to break your set rules. In this case, you should try to avoid them, especially if they are affecting your trade’s performance. Additionally, avoid sticking to the same rules for a more extended period. By changing them often, it’s easy to identify your mistakes and come up with solutions before things get out of hand.
- Do Not Forget The Use of Risk Management Controls
This element is more critical in stock trading, and it shouldn’t be overlooked. The most common risk management tool used by stock traders is a stop-loss order. Stop-loss orders automatically close a position when it reduces to a certain level, saving you the risks of incurring huge losses.
Stop-loss orders can either be standard or guaranteed. A standard stop-loss will close your open position at a set level in your trade. However, note that when price gaping occurs, this stop-loss order is prone to slippage.
In contrast, a guaranteed stop-loss order is more advanced than the standard one. Although you will pay more for this risk management tool, stock trading positions will be closed at set levels regardless of market behaviour.
Stock traders must be patient, and if you do not possess this characteristic, then maybe stock trading is not meant for you. Simply because you know the best strategies for stock trading doesn’t mean that you have the sure-fire weapon to executing a trade successfully. In case you experience losses, learn from your mistake, and don’t be afraid to try again until you get it right.
Additionally, do not rush to open a position if you cannot find a viable opportunity to earn profits. Instead, analyse the markets and stay informed with trending news on stocks to be able to open a position that has potential for profits.
- Be Flexible
Trading stocks using the above strategies requires you to be flexible, especially when trading short-term positions. This is because the volatile markets tend to change rapidly, and when they do, you need to be there to adapt to the changing market and alter a trading strategy accordingly.
Stock trading is easy if you are fully knowledgeable about how it works and its trading strategies. Pick a stock trading strategy that aligns with your trading plan and expertise level. Also, do not stick to one trading strategy even if you see an opportunity that requires a different strategy.
Remember that losses might occur at some point in your trade, and this should not dishearten you. Learn from your mistakes and grow from there. Change strategies if need be until you get it right. In addition, track your stock trading performances, whether profits or losses, for you to remain disciplined and consistent.