Trading Profits Based on Stock Market Strategy
By: Mark Crisp | Posted: 11th October 2007
Learning about the predominant trading strategies will provide you with the foundation to develop your own trading style or to provide you with a knowledge base so you can better choose an effective fund management approach. The most popular stock trading strategies are day trading, swing trading, momentum trading, growth trading and value investing. Following is an overview of each strategy.
In the strictest sense, day trading refers to buying and selling stocks in the same trading day. This strategy means that profits are realized on the same day and that any potential, adverse market variations which may occur overnight are avoided. Apart from stocks, other financial instruments which lend themselves to day trading are stock options, currencies, and a multitude of futures contracts. A day trader may complete anywhere from one to dozens of trades within a single day. Because of the very short term nature of day trading, it is vital to maintain a vigilant approach throughout the day. Whilst day trading can be very profitable there is also the potential to incur large losses in particular if one has poor risk, money management or discipline.
In relation to the stock market, momentum means the speed at which a stock changes price and is usually also coupled with high volume changes. Momentum trading then is using changes in momentum as an indicator for making buying and selling decisions. In essence, traders locate stocks that are moving in a trend, coupled with high volume, and then enter the trade. In its broadast sense, momentum stocks can be identified which can undergo large price changes of a longer time frame such as a many months or a year. This strategy has the potential of realizing big profits based on big stock moves as opposed to the frequency of day and relying on smaller profits. It is not uncommom for the momentum trader to accumulate profits of 500% or more per year.
Swing trading is a short term trading strategy with stocks being held from, generally, a few days to a few weeks. The idea is to identify stocks undergoing a consistent oscillation and to buy low and sell high. Swing trading is therefore best applied within a relatively stable market whereas trend following is more applicable in either a bull or bear market where the upward or downward trend can persist for a longer period of time.
Value investing centers around understanding the value of a stock in relation to the company fundamentals. The fundamental analysis of a business involves analyzing its financial statements, how well it is doing, its management and competitive advantages as well as its markets and competitors. Value investors identify stocks which they consider to be under priced and will therefore grow in price. This is more of a buy and hold strategy since it is the market which ultimately determines the value of a stock and whilst the stock may be undervalued in principle it may take some time for the market to adjust its value perception.
In contrast to value investing, grow investing targets companies which show signs of above-average growth independent of whether the current price appears to be over-valued. The notion is that the company will continue to grow and that the growth will be reflected in the share price. Ideally, this strategy should be tempered with a consideration of growth at a reasonable price since any overvaluation may be corrected by the market. This style of investing requires a close monitoring of financial news with a view to finding companies which are just starting to show signs of growth.
Value investing, day trading, momentum trading, swing trading, and growth trading are all proven methods. However that doesn't mean they will reap profits all of the time. Whilst some professionals recommend diversification in your portfolio of stocks the same cannot be said for your stock market strategy. Choose your strategy based on your financial goals, your capital base, your tolerance for risk, available time and then determine to master your chosen stock market strategy.
Mark Crisp is the creator of the Stress Free Momentum Stock Trading System. An especially effective trading method that focuses on big moves for big profits. Mark also provides a complimentary copy of "The 7 Habits of a Highly Successful Trader" at http://www.stresfreetrading.com
About the Author
Occupation: Stock Trader
The Momentum Stock Trading System focuses on big moves for big profits. Mark Crisp provides a complimentary copy of the "7 Habits of a Highly Successful Trader" at
www.StressFreeTrading.com
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Tags: stock options, day trader, management approach, price changes, selling stocks, term nature, futures contracts