The Most Common Types of Trading Strategies

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Money’s falling from the sky! 53% of American families own at least one publicly traded stock. The median value of stocks amongst American households is $40,000.

If you want to earn tens of thousands of dollars a year, you should start trading stocks. However, you shouldn’t call your financial advisor and make a trade just yet. To make the most money, you need to master trading strategies.

What are some of the most popular trading methods? What are good strategies to do as you are learning how to start trading? How should you trade if you want to take risks?

Answer these questions and you can become a master stock trader in no time. Here is your comprehensive guide.

Day Trading

Ask a trader about trading methods, and they’ll talk to you about day trading. Day trading involves buying and selling a security within the same day.

The key to day trading is price fluctuations. Over the course of a day, a price may drop and rise in value based on company developments and trends in the stock market. You want to buy stocks when they are at a low price and then sell them at a high price.

This means you have to pay very close attention to the market. You have to know what the latest news is, and you must have stock tickers available that tell you what the prices are. You can use free websites like CNN Business to monitor developments.

Most people who do day trading are full-time professionals. If you’re looking for less stressful types of trading, you may want to try another type. Once you’ve developed experience in several types of trading strategies, you can try day trading.

Many people make thousands of dollars off of day trades. However, you may have stocks that decline in value or remain flat. You may still want to sell these stocks so you don’t risk losing more money over time.

You can also day trade several securities at once. It can be difficult to follow the values of your securities simultaneously, so keep multiple screens on your computer open so you can see everything.

End-Of-Day Trading

End-of-day trading is a variant of day trading. A stock’s price may rise toward the end of the day, as investors try to close final deals before the market closes. You can take advantage of this by buying stocks and selling them quickly for a profit.

But you shouldn’t rush into your trades. You need to examine how a stock did on previous days, including during the opening hours of the market.

If you think you might turn a profit during the opening hours, you should hold on to the stock and sell it the next day. You can also sell the stock during the concluding hours of the next day.

If you plan on holding onto the stock overnight, you should place a stop-loss order. You will specify a price, and if the stock reaches that price, it will be sold automatically on your behalf. This protects you if the price drops too much during the night.

End-of-day trading is better for beginners than day trading as it requires less studying. Yet you must still spend time examining the charts of prices during the morning and evening hours. You must also prepare for your stocks to drop in value after normal hours, which can hurt your holdings.

News Trading

As the name suggests, news trading involves trading based on recent developments in the news. A company may announce a new product, which can drive sales up. A company can also announce that it is letting go of employees or changing its CEO, which can send its stock prices down.

News trading methods require you to know about developments as soon as they occur. You need to analyze the development and decide how it will affect the prices. Then you must act quickly.

Some stocks do not change following company developments, even dramatic ones. Traders may be confident in a company’s brand or leadership, so they don’t sell or buy stocks and the price won’t change. This means you must have close connections with other traders and customers of the company in order to time your trades properly.

You should know about the company and how previous news items have changed its stock prices. If the company has a track record for consistency, you may want to hold off on selling your stocks.

Prices can change based on expectations and rumors more than on actual news. If you hear about a rumor, you should check to see if it is accurate. You may need to sell your stock even if the news is not accurate, as people may be selling their stocks anyway.

Most people who try news trading are professionals who can monitor the news and markets constantly. But you can try it if you check the news every day and understand how other traders may react.

Position Trading

Position trading is the opposite of day trading. You hold on to your stocks for months or years at a time, profiting off of long-term trends instead of minor fluctuations.

To determine how a stock will change, you can use fundamental analysis. You do not examine the market value of your holdings or what other traders think about your holdings. You examine documents like financial statements, market releases, and yearly reports.

If you think a stock or security has value, you can buy that stock. But you must keep reviewing the company’s documents and determine when you should sell it.

Position trading does require looking at the news. One news development can change your entire strategy and force you to sell your stock early. But you must remember that the stock can regain value once the news passes.

You should also think about stock splits. A company may decide to reduce its price per share, which lets them increase the shares it has to sell.

This will not affect your holdings. If you had a stock valued at $250 and the company did a two-for-one split, you would now have two stocks valued at $125 each. However, the split makes it harder to earn a profit off of one stock, and you may find it hard to sell both at once.

Over the years, you may make a profit in position trading. You will save time through position trading, as you do not have to check your holdings every day.

But minor fluctuations can cause significant reversals, which can cause you to lose money on one stock. You should buy multiple stocks from different companies to protect yourself.

Swing Trading

Swing trading involves trading securities based on the movements of the market. You want to buy a security when you think the market will rise and then sell it before it falls.

As with position trading, you need to do extensive research on the company you are buying securities from. You also need to study the market and understand how traders behave during swings.

You must learn not to overreact to swings. Retracement swings are temporary reversals that take place during long trends. A stock may rise in value momentarily and then fall back down, or vice versa.

You need to notice a retracement swing as it occurs and decide if it is temporary or not. You then need to think about whether you should profit off of the swing. Consider buying a stock that temporarily drops in price and selling it after the swing is done.

Swing trading can work as a hobby. But you can make more money if you follow the market closely and keep your eye out for retracement swings. Holding onto stocks overnight can be risky, so file stop-loss orders to protect your holdings.

Scalping

Scalping involves making profits off of small changes in a stock’s price. You can notice small trends and immediately capitalize on them.

Many scalpers make hundreds of trades every day so they can turn a high profit. But you can try scalping with just a few securities, as long as you pick lucrative ones.

Scalping requires technical analysis, which involves studying past market data to determine how prices will change. Many scalpers look at candlestick charts that cover one or five minutes of trading activity, helping them pinpoint the exact moment they should buy and sell. If this would be too labor-intensive, you can try algo trading and use a computer to place orders whenever prices change.

Though you can make as many trades as you want, you must be careful not to become a pattern day trader (PDT). A PDT is a person who executes at least four trade trades within five business days. A PDT is subject to regulations, and they must hold a certain amount of money in their account.

To avoid becoming a PDT, you must have account equity of more than $25,000. You can exceed this equity by holding a few long-term securities in your portfolio.

Keep in mind that each trade has a commission attached to it. Your trade must make you more money than the commission price in order to be profitable. This may require holding onto your security overnight.

Scalping is one of the most time-consuming types of trading methods. You must pay attention to the market minute by minute and execute your trades quickly. Yet it is one of the least risky strategies, as you can trade assets that are not volatile.

Momentum Trading

If you try momentum trading, you will buy rising securities and sell them once they have peaked. Most professional traders are momentum traders because it is a fairly straightforward strategy. You can sell a stock quickly or hold onto it, capitalizing off of its rise in value.

You have to know about many stocks and find the ones that have the highest potential for profit. This means looking at the company’s stock history and following the news. But you do not have to check the news every day or examine your holdings unless something drastic happens.

Timing is everything in momentum trading. If you sell too late, you will lose money. You should practice momentum trades on low-value stocks until you learn how to time your trades correctly.

Fading

Fading means you make trades that contradict the prevailing trend. If a stock’s price is high, you can place a short position on it, expecting it to drop back down. If the price is low, you can make a long trade.

To make money off of fading, you have to determine when a stock is overbought or oversold. You can use candlesticks and other charts that show the pattern of a stock over time.

Though you can buy a stock whenever you believe it is overbought or oversold, you may want to wait until you notice signs of change. You may notice that the volume of the stock is changing or that people are losing faith in the company that owns the stock. At that point, you should enter into a trade.

Fading is high-risk, high-reward. Many people assume that a stock will change directions only to be proven wrong.

You may need to hang on to stocks until the trend ends. Though most trends end within a few days or weeks, some take months to break. This means that you need to prepare stop-loss orders and get through retracement swings.

The Best Trading Strategies

Trading strategies can make or break the success of your stocks. Day, end-of-day, and news trading are among the most popular strategies. But you must study market trends and make fast trades.

If you want to make trading a hobby, you should consider position, momentum, or swing trading. After you’ve gathered experience, you can try scalping and fading. These two strategies are very risky, but you can make thousands of dollars with them.

Once you’ve found a strategy you like, you should do a deep dive into it. Read detailed stock trading guides by following our coverage.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.