Different ways of trading stocks
Trade on the stock market is quite different from invest inside. Trading is a short term game while investing is aimed at making you money in the long term. As a result, trading strategies are very different from investment strategies.
Today we’re going to take a look at different strategies that can help you make money in the short term by trading stocks (or other assets). Investing in stocks is generally a more passive strategy while trading is inherently an active game, and one of the main differences between these different strategies is the time frame in which you buy and sell.
Familiarizing yourself with these two different strategies can help you become a master of the market, and once you’ve become familiar with them, you can begin to determine which approach is right for you.
The difference between a trading strategy and an investment strategy
Simply put, a trading strategy is a game plan of how you buy and sell stocks for the short term to make money and is a completely different beast than buying and holding or trading. long term investment.
Long-term investing involves buying shares of an asset or business to generate future cash flow over time. Typically, you would invest in a long-term asset when you believe that asset will appreciate over time, or you would invest to reap regular income like dividends or income.
These investments can last for months or even years.
On the other hand, trading essentially consists of flipping stocks over a short-term time horizon (days or even hours) in order to take advantage of price fluctuations. These price movements aren’t necessarily predictive of an asset’s long-term performance, but as an active trader you don’t necessarily care about an asset’s long-term performance.
Nonetheless, in order to be successful at trading stocks, you need to have a battle plan because it is easy to lose a lot of money when trading stocks. By having a trading strategy, you will be better able to make money in the game.
There are a number of different strategies for stock trading that you can use. Let’s take a look at some of the common trading strategies.
Common trading strategies
1. Trading day
Day trading is a famous trading strategy in the market often associated with the dot-com boom. The reason we call it day trading is that it involves trading stocks on the same day.
Day trading became quite important during the dot-com bubble. It was all the rage back then, and while it might not be as popular now, you can still make a lot of money.
Like other strategies, day trading involves a high degree of dependence technical analysis, which examines short-term microtrends in a stock’s price. It’s different from fundamental analysis, which examines the overall financial performance of the underlying asset.
For example, let’s say you buy shares of Coca Cola (NYSE: KO) priced at $ 40.50. If your technical analysis told you that the price was going to rise to $ 40.60 on that day, you would sell your position the moment it did.
Now, $ 0.10 may not seem like a huge returnâ¦ and if you’re only buying one stock, it isn’t. But what if you buy 10,000 shares? You just won $ 1,000 fast – in one day! This is why trading strategies like this can earn you a huge return in no time.
2. Swing Trading
Another of the trading strategies is swing trading. Unlike day trading, swing trading involves a time horizon longer than one day. A position can be occupied for days or even weeks.
Swing traders tend to take positions based on activity around market trends. Specifically, swing traders look for when a trend is moving in one direction but appears to be reversing. This creates price volatility that a swing trader can take advantage of by using rules or algorithms to predict price movements.
Swing trading is a popular strategy with those interested in active stock trading but who do not have all day to devote to the intense monitoring necessary for successful day trading. While swing trading is not usually a full-time job, you need to spend time every day monitoring the market.
3. Exchange of positions
If you are a particularly talented trader, you can use negotiation of positions follow short-term trends in the prices of certain stocks. Depending on your perspective, some people see this trading strategy as a longer term investment or a buy and hold strategy rather than active trading.
Position trading looks for stocks that have trended up or down in price. Once this trend is identified, position traders enter the action and ride the trend until it breaks. Then they look to exit the position once they identify the end of the directional trend in a stock’s price.
To do this, position traders can use a variety of methods, for example, studying stock charts over a short period of time, like days or even a few months.
Which trading strategy is right for you?
Each investor has their own attributes, skills and circumstances. There is no one-size-fits-all trading strategy and, in fact, for some people active trading should be avoided altogether. Instead, they should pursue a longer term buy and hold investment strategy.
But if you are interested in short-term active trading, day trading, swing trading, and position trading all have different advantages that you may find valuable. The best way to figure out what’s right for you may involve some experimentation.
Ultimately, any of these three methods can be a trading strategy that could help you make a lot of money on the stock market. While the risk can be high, the reward for a talented or dedicated trader can be even higher. To learn more about trading and investing, register for free Trade of the day e-letter below. It is packed with advice and research from investment experts.
About Brian M. Reiser
Brian M. Reiser holds a Bachelor of Science in Management with a concentration in Finance from Binghamton University School of Management.
He also holds a BA in Philosophy from Columbia University and an MA in Philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.