Monday, November 18, 2013

6 Free basic stock trading strategies

In order to understand the basic stock trading strategies, you must first know what kind of trader you are. This is directly related to the strategy you are going to implement to your trades, mainly to find a good entry position (long/short). It really depends on how long you want to hold to your trades. If you're quickly entering and exiting the markets, and only hold to a stock or security for no longer than a few minutes or even seconds, you're classified as a scalp trader. These kinds of traders never last long, since it takes a tremendous effort to be one, making dozens of trades everyday is simply exhausting after awhile. A day trader only holds on to a stock for a day, and speculates on intra-day price movements. If you are a swing trader you'll keep a stock for a couple of days, and usually you trade with daily, or weekly charts. A position trader will hold stocks for weeks, if not months. In the event you find yourself to be a swing trader or position trader you may be better off trading stock options, they're not only cheaper; it's also more profitable.

#1 Fading

Fading is basically quickly shorting a stock after it has reached new highs and is a form of scalping. The reason a trader may use this strategy is because he/she may think that particular stock is too overbought, or previous buyers of the stock are cashing in on profits. It can also be done the other way around, and buying on lows.

#2 Daily high/low

You can apply this if you're a day trader. There are many websites that provide you with the most profitable stocks of the day (some that shot up like 20% or more), and the stocks that lost the most value that day. So, the stock is either way too overbought or way too oversold, which means you can find a bargain to buy or a good short.

#3 Technical Entry/Exit positions

There's automated trading software for this, but you can also do it manually. Technical trading can be applied to all the types of traders. It's simply looking at your charts, including any indicators and oscillators - there's unlimited variations of this, since everyone can enter different values in their trading program. It's very simple, basically when certain conditions are met, like the RSI 14 trades below 30, and the moving average (MA) cross over each other it triggers a buy signal, which is then automatically executed when you use automated trading software or you'll be alerted that this might be a possible 'play'.

#4 Copy Trading

Although not really an art, it is a strategy. Copy traders simply copy other traders. They can 'follow' traders that are the most successful and have a proven track record. This can be done automatically, the trade will happen as soon as the trader you follow makes his or her move, or you'll get an alert about a trade someone you're following is making. Then it's up to you to decide whether or not it's a good trade and you want to copy it.

#5 Trading the news

Stocks that are in the news are most likely the ones that carry momentum. You're riding the wave until there's a clear sign that there's going to be a pullback. The problem with this trading strategy is that news is often delayed and the stock has already moved in the direction of the nature of the news story (positive/negative), basically you're running after the fact in that case. However, there are (breaking) news stories that have a long lasting effect, and are usually stories about larger or well known companies.

#6 Earnings reports

Look on the calendar and see when companies release their earnings reports. Then a few days before the release, see what the expectations are from analysts and other experts; do they see the company miss, meet or exceed their earnings? Stocks have the tendency to become a little more volatile before the release of an earnings report than usual. This extra volatility is what can make you money, especially if you follow and understand what the analysts are expecting. Although often, keep in mind that stocks don't always go up when the company meets or exceeds earnings. In this case there could be an underlying problem.

The basic stock trading strategies mentioned above are of course only a few of them, but I think they are the most profitable and the most consistent. Especially when you focus on one particular strategy, you'll notice that you will eventually you'll see a pattern or recognize the overall behavior of certain stocks or companies. Do you basic research of the companies you know/like and apply one of the tactics on the list. If you know of any others that are worth mentioning, leave a comment.

By: +John van der Munnik / Follow VDM Trading at @vdmtrading and +VDM Trading

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