7 Stock Trading Strategies You Shouldn’t Ignore
If you’re looking for the best stock trading strategies, there are many different approaches to take, all of which rely on your trading style. As an active trader, there are stock trading methods that will help you take advantage of market movements, various market trends, and more to capitalize on your short-term investments. You can use the information in this guide to learn about several popular trading methods and the stock trading strategies that work to position yourself for substantial returns.
Key takeaways from this guide:
- A strategy for stock trading is a method traders use to buy and sell within the market. Trading strategies are typically based on a set of rules that traders will use to help them make trading decisions.
- The best strategies for stock trading include day, trend, and swing trading methods, along with strategies such as the breakout, scalping, momentum, and reversal strategies for stock trading.
- Using trading strategies effectively depends on a few key factors, including your risk tolerance and capital, your knowledge of the securities you’re trading, your time commitment, and your consistency.
What Is a Strategy in Stock Trading?
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A stock trading strategy is essentially a method traders use to buy and sell in stock and index markets. It’s based on a set of predefined rules that a trader will use to make their trading decisions.
The best trading strategies use a trading or investment plan that outlines specific investment goals, a trader’s risk tolerance, trading time, and the taxes they’ll need to cover on gains. Understanding which strategies for stock trading are the best for you will depend on the style of your trading and the methods you use for finding the stocks, ETFs, bonds, and other securities like options or futures contracts that you want to trade.
Additionally, once you plan out the strategy you’re going to use for trading, you’ll need to monitor your trading position continuously so you can make adjustments or close on your positions when you need to.
Stocks Trading Strategies for Active Traders
When applying different stock market trading strategies, it’s important to look at your trading style. For example, an active trader won’t use the same types of strategies that long-term market investors will, and vice versa. If you’re an active trader, though, you’ll want to pay attention to the following stock trading methods. Since we’re not brokers, it’s important to discuss the best stock trading technique that will be the biggest benefit to your portfolio with an experienced broker.
1. Day Trading
Day trading is technically another term for active trading. It’s not truly a strategy per se, but it does provide a method of making an income from stock trading. It used to be that more advanced and knowledgeable stock traders used day trading to capitalize on frequent trades, but with the prevalence and growth of online brokerage and trading accounts, many beginning traders are looking to day trading as a stock trading method with the potential for substantial returns.
With day trading, you’re simply buying and selling stocks on the same day. You would close any position you take on the same day you take it, never holding your position on an asset overnight. The key to this method of trading is that you need to be aware of the stock’s price movements to take advantage of the earnings potential.
2. Trend Trading
Trend trading, or position trading, is a strategy that most traders don’t actually consider an active trading strategy, but it can be used in active trading with some more advanced market and trading experience. Trend trading relies on charts displaying stock data over longer periods of time, such as daily or monthly, along with methods that help identify current market trends in the stocks’ direction. Position trading can take as little as a day or several days, a few weeks, or sometimes longer. It all depends on the current market trends.
Active traders that apply trend trading as a strategy typically look for continuous highs on the higher end or on the lower end in order to find a stock’s particular price trend. Traders will then try to take advantage of both upward and downward market trends by looking at the overall direction of the market rather than specific price points.
Additionally, active traders who use trend trading typically get in on the trend after it’s already established. When that trend breaks or changes, the trader will exit their position.
During times of higher market volatility, trend trading can prove more challenging than when there is lower market volatility.
3. Swing Trading
When a trend does happen to break, swing traders are the investors who get in on the action. At the end of a market trend, there will typically be some volatility in the price points as new trends get established. Swing trading then is the strategy to use to buy or sell as volatility in prices occurs. Swing trading is usually done in more than a day but on a much shorter timeline than trend trading is done.
Additionally, traders who use swing trading as their main trading strategy will frequently create trading rules that are based on fundamental and technical stock analysis, which can help traders determine the best times to buy and sell a stock.
4. Breakout Strategy
Breakout trading strategies focus on stock prices that clear specific levels within stock charts with increased trading volumes. Active traders will commonly use this strategy to take a long position after the stock breaks above a specified resistance point, such as a specific minimum share price. On the other side of this strategy, active traders would take a short position in the event that a stock’s price breaks below a specified resistance point, also called the support level.
So after you trade an asset beyond the price point of specification, the volatility would increase and stock prices would then trend in the breakout direction. To use this strategy, you need the right assets to trade that you know the resistance and support levels of. This means that the more often a stock’s value hits the resistance and support points, the more important these points will be for active traders. There are a couple of elements to this trading strategy:
- Entry points: Entry points refer to stock prices that are due to close above specific resistance levels and sometimes tend to require a bearish trading position. On the other hand, stock prices that are due to close below support levels will require a bullish trading position.
- Exit points: Exit points are the price points that you set as your target price for trading assets. Traders commonly use stock performance and recent price swings to calculate an appropriate exit point.
5. Scalping Strategy
S calping is another one of the common stock trading strategies that active traders use frequently in the forex market. The object of this strategy’s game is to capitalize on subtle price changes, where the number one motivator is smaller quantities of shares. This means that traders will purchase an asset at the bid price and sell it at the asking price to earn the difference between these two prices. Traders who rely on the scalping stock trading technique commonly try to keep their positions for a short time to lessen the risk attached to this trading method.
Additionally, traders who use the scalping strategy don’t look for drastic price moves or deal with high trading volumes. Instead, this strategy focuses on the more subtle price movements that frequently happen, along with fewer volumes. Some things to consider when applying the scalping strategy include the following:
- Keep your eye on more liquid markets for more frequent trades, since the profits per trade can be smaller.
- Look for markets that aren’t prone to drastic price movements to make spreads on the same bid and asking prices.
- Scalping can be risky, so you’ll need a high probability of trading to even out your risk-to-reward ratio.
6. Momentum Trading Method
The momentum trading strategy is a common starting strategy for beginning traders, and its main focus is on using financial sources and news outlets to keep an eye on trending stock moves. Momentum trading also revolves around identifying substantial support in the way of high trading volume, so that active traders will always have a chance of trading at least one stock that will move between 20% and 30% each day.
This means that there are plenty of opportunities to make a profit with the momentum trading strategy, as traders hold their positions until there are indicators that point to a reversal in the stock’s momentum. Then, active traders using this strategy sell the asset. To effectively use this stock trading strategy, keep the following factors in mind:
- Make a list of several quick-moving stocks that can potentially earn you a profit when you apply the momentum strategy.
- Stay aware of all the news, financial announcements, and trending movements of the stocks you listed.
- You can also fade the falling price, which means your target price point will be when you see the stock’s volume start to decrease.
7. Reversal Trading Strategy
Reverse trading is quite risky, so it’s often only used by experienced traders. This strategy is almost the opposite of trend trading, in which a trader’s goal is to capitalize on trading against the current trend. This method of trading is also called pullback trending, as traders identify potential pullbacks in the market trend, along with the strength of the pullback. One common occurrence with reverse trading is the daily pivot technique, which focuses on buying and selling stocks at their daily lows and pulling back or reversing from their daily highs.
With some practice, such as with a trading simulator or paper trading, you can apply each strategy in various trading scenarios to gain a better understanding of how to use each method. Once you have the understanding you need, you can apply these trading strategies on the real market.