Like any business, trading stocks should rest on a foundation of solid information. For the potential, new stock trader, here is some food for thought in considering your involvement in trading.
If you are cashed up and looking to invest and acquire a good return on investment, then you may have already looked at the stock market. The stock market can be profitable if you employ an effective strategy which will optimize your results.
There are a number of different strategies available when trading shares. Learning about the various trading strategies is essential to develop a clear understanding of a style which will best serve you. This will allow you to get started with a enough clarity to make effective decisions.
The first strategy to consider is day trading. Here a stock is purchased and, according to the strict definition, sold again on the same business day. For seasoned day traders, there may be many trades undertaken on any given day. Whilst some trades can result in large percentage gains, the value is in multiple trades for a small percentage profit. Because the time frame is so short profits are realized quickly. The downside of day trading is the amount of time taken. It is important to stay informed of the price since small changes can result in either a lost opportunity to take profit or if the price moves against you, a loss. The other thing to consider is the brokerage fees. Multiple trades means multiple fees as well as additional accounting. These prices need to be factored into the equation to determine your actual profit.
Swing trading is the next strategy on a continuum from short-term to long-term trading. Using this method a swing trader will hold stocks from a few days to one or two weeks. Variations in price are considered on an intra-week or intra-month basis. Overall the stocks which are best suited to swing trading are large-cap stocks such as Microsoft, Intel or Cisco Systems. A baseline price is needed to evaluate the oscillations in stock price for any given stock. This can be provided by charting a stocks Exponential Moving Average (EMA). From this baseline it is easy to examine price fluctuations. This is particularly true of a market which is going nowhere. In strong bull or bear markets, a longer term strategy is more applicable. Swing trading is especially suitable for the new trader to gain some experience in the stock market. One advantage of swing trading over day trading is that there are fewer trades and therefore lower brokerage fees.
Trend following is the third strategy. This is a long-term strategy where greater profits can be realized. However, with the potential for greater profits comes a higher risk. In trend following the overall movement of the market, market sectors and individual stocks is considered. The minor variations in stock price are overlooked in favour of the prevailing trend. Factors for consideration in discovering buy and sell signals are moving average and breakout. Buying and selling is undertaken once the trend is established. In this case the initial stages of a breakout will be missed until the trend is established. Whilst it is always important to be aware of your stock positions and performance, trend following doesn't require the same time investment as day trading and can be a much more "comfortable" way to trade stocks. Other elements in trend following include money management and risk management. How much of your trading funds to invest and strategies to cut losses effectively.
Knowing the difference between trading stocks methods, allows you to discern which one will best serve your needs. It is important to keep in mind to respect your budget limits and to invest only what you can afford.
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