Image by Ahmad Nawawi via FlickrThe stock market is a powerful way to increase your wealth. With many different strategies out there which people can use to take full advantage of it, it will be your choice to look for the best match. Here are five major trading strategies in which every trader can find its place.
1. Buy and Hold
Most people preach the buy and hold strategy because it is simple, passive and most people can do it without much effort. How long does it really take to buy a couple of mutual funds or ETFs and forget about it after all? Because stocks historically go up over the long term this can be a relatively safe way of investing (Example: Warren Buffet's Berkshire Hathaway).
2. Following the Trend
Another strategy which is similar to buy and hold which can be much more powerful is following trends. This strategy involves buying stocks that are trending up and holding onto them until they are no longer going up. This way you can get into stocks that are making the big moves and get out of them as they start to pullback or trend sideways. Most traders use a tight stop-loss of 5% or 10% under the actual stock prices to secure recent gains. It may sound simple, but sometimes simplicity works.
3. Short Term Swing Trading
Swing trading is the process of using technical indicators (charts, 200 day average price lines) to give traders buy and sell signals for a short term trade. The idea is to constantly monitor your positions, cutting your looser earlier and letting your winners move up in order to maximize your gains over the long term. Any trade with a profit target, a stop loss and hold longer than one day is basically a swing trade.
If you want to leverage your gains in the stock market, traders are using options. A 10% move in the price of a stock could mean a 100% move or more in the price of an option. While option trading is very powerful and you can gain quick money even with a small bet it isn't something to start off with. The best traders only consider option trading after they have already mastered short term trading as it is a risky investment when the market suddenly change in the other direction!
5. Short Term Day Trading
Day trading has been given a bad name by professional buy and hold trader, but the truth is it can be very profitable. It even gives the stock market the fuel to trade stocks. Without day trading there wouldn't be much to report from the stock market. Any trade that was bought and sold before the end of the trading day is considered to be a day trade. Day traders may have their ups and downs, but overall they can be very profitable.
Each strategy offers traders something different. Buying and holding is better for passive investors who can't follow the daily swings and news. Day trading is better for traders who have the time and willingness to play a very active role in their investing. Risk-oriented persons will like the power of option trading which occasionally needs really strong nerves.
Learning the different strategies and experimenting with it can certainly be worthwhile and might help you in recognizing which strategy fits you the best. One way to learn it without losing money would be taking part in virtual stock market games, some offer even weekly/monthly prizes for the best performance of your "play" account!
Do you trade stocks, funds or options?
Which kind of trader are you, risky or conservative?
Which experience did you make with these/your trading strategies?