Common Stock Trading Strategies

Common Stock Trading Strategies The market is always in a fluid nature every day. However, there are some patterns that pop up, and they may signal new opportunities to investors who know their game. There are some daily changes in prices that happen in the market. Though they may seem random, they could actually be trends that day traders can exploit to make money.

In this article, you will learn the best​ ​stock trading strategies​. We will also show you how to analyze each strategy; the pros and cons and finally how to choose the best one for you.

We will cover the top 5 strategies below: 1.

Breakouts

These are among the most popular techniques that traders use today. It involves the identification of a key price level. One then waits for the price to break that level after which they either buy or sell. The basic idea in this strategy is that if the price is strong enough to break the set level, then it will stay in that direction for some time.

If the market is on a trend and it’s headed in one direction, the breakout strategy simply ensures that you will never miss the move.

The​ ​breakout strategy​ is basically used when the market is close to or is already at the extreme highs and lows of the recent past. It’s expected that the trend will continue and that the price will actually break the extreme high and carry on. With this information, all you need to do is to place an order immediately above the high or immediately below the low so that when the price moves, the trade is automatically entered. These are referred to as limit orders.

When the market is not trending, it’s very important to avoid trading breakouts. This is because fake trades will occur and they will, in turn, lead to losses, the reason being that the market doesn’t possess the momentum to carry on with the move beyond the extreme lows and highs. Once the price gets to the extremes, it goes back down into the previous range. This may lead to losses for traders who’re expecting that the trade will still continue in the direction.

2.

Retracements

This strategy requires a completely different set of skills. It involves the trader having to pick a particular direction that the trade is expected to move in and holding to his opinion that it will keep moving that way. The basis of this strategy is that traders will be taking their profits after each move the price makes in the expected direction and as it temporarily reverses. This all happens as the new traders make their move in the opposite direction. These retracements or pullbacks afford professional traders the unique opportunity at a better price with which they can enter the original direction just before the move continues.

This type of strategy requires intensive analysis. Similar to breakouts, resistance and support are also essential.

Traders are immediately made aware of the breaching of the various price levels during the original move after the initial move has already been taken. Careful attention is particularly paid to key levels of resistance and support and some areas on the chart such as ‘00’ levels. These are the areas that they will be hoping to buy from or sell to in the future.

Retracements become a trading strategy when the economic events and news alter the short-term sentiment. Some shock waves can be caused throughout the market by this news resulting in retracements against the original move’s direction.

The reasons for the move might still be around as well but the event occurring in the short term might cause investors to develop some fear, and they will end up pulling out their profits. This is what causes retracements. Since the initial conditions still remain, they offer new investors the opportunity to buy back in at a better price. Most of them usually do this.

If there lacks any clear and important reason for the move at the get-go, retracement trading becomes ineffective. As such, if you’re able to identify a huge move, but you cannot actually pick out a clear reason for the move, then the direction can change immediately and what would seem like a retracement becomes a completely new move in the opposite direction. This results in losses for traders who hold on to the original move 3.

Reversals

This strategy is mainly used when there’s little fundamental activity by technical based traders. When this happens, the markets appear to be moving sideways around a middle point without a clear sense of direction. Traders are always hoping to see a key price level that they can exploit by trading directly from it as they expect a ‘bounce’ when the price hits it. These bounces provide traders with the opportunity to make profits even with low activity in the market volume.

Similar to the previous strategies, the tools used in this strategy are fundamental analysis as well as support and resistance.

Before diving into reversals, make sure that there are no major announcements set to be made during that session and also that there are no key players set to give comments to the press about the assets. These events can both trigger moves that will lead you to make significant losses in your trading activities.

Once the important parts are dealt with, we now need to lay our focus on the technical analysis. In particular, the resistance and support levels close to the current price.

For traders who use this type of strategy, they mainly look at three precise levels; Fibonacci levels, Pivot point levels, previous highs and lows from the old trading sessions and the specific areas where all three of these levels overlap. The overlaps are referred to as confluences, and they give you some areas from which you can expect the price to bounce during the period of the trading session.

There are generally varying expressions, but most traders will be looking to make small profits as opposed to holding on to one position for a long time (many trading sessions).

Trading reversals are limited only for times when there’s no clear direction in the market trends. Using this strategy in every market session could prove to be very dangerous, and you could end up suffering huge losses.

4.

Momentum

This strategy is more concerned with the force that the move takes, as well as its continuation, as opposed to precise entries. Traders are waiting for the price just to start moving in the direction that the prevailing trend is taking rather than waiting for the price to break out or pull back from a specific price.

Though this strategy is fundamentally based, it also uses some other indicators such as oscillators and moving averages to give signals.

The momentum based strategy is used by traders when they feel that the asset they are trading will be making a long-term move. For instance, if there happen to be major changes in a nation’s current state of affairs that will spill over into the interest rates, this immediately prompts investors to either start buying or selling the currency of that country about those changes. Another example is geopolitical events which usually last for several months or even years.

During these periods of significant shifts, professional traders will always seem to trade these currencies over the long term. Sometimes, they may hold their positions for weeks or even months.

Since this strategy is usually long-term, traders pay less attention to the entry points. They simply wait for minor technical analysis to give them the opportunity to make profits from the move. The most popular indicator of this type of trading is the​ ​200-period moving average​. Most of the time, traders will be looking for the price to break either above or below the moving average about the anticipated move. At this point, they make their entry into the market and hold on to their positions.

For exit strategies, the same fundamentals as those of entry are used. Traders pay keen attention to the geopolitical situations and the economy before settling on the best strategy they should take. They also decide on how to manage the ongoing positions.

5.

Position Trading

This strategy adopts more of the momentum style and goes further to eliminate the importance of entry.

The main concern that the trader has when using this strategy is to be in the market when the price shifts.

Making a move into the market may take some days or even weeks as the price is shifting. The major part of this strategy required from the trader is confidence during the prevailing fundamental conditions that are causing the price to shift, and also the hope that the price will eventually move in the direction hoped for.

This strategy sounds incredibly similar to the momentum strategy, but there’s a key difference in both of them. It lies in the approach taken as traders take their positions in the market. When it’s expected that the

asset will move in a certain direction over a long period, traders will immediately start trading the asset in small bits.

The major reason for this happening is that during the sustained period, there’s bound to be temporary adjustments to sentiments and short-term retracements. These two events provide traders with the opportunity to trade their asset as it undergoes a pullback against the general move.

Traders will use this as an opportunity to trade at a favorable price and also to solidify their position in the market. All this will be happening as these small events bring in a loss of confidence and cause confusion.

Position traders will be taking advantage of emotions which leads many traders into liquidating their positions and take their profits during the short-term moves in the market, all against the prevailing trend.

Given that the market moves this way, traders will be looking to add more to their position as the prices keep on improving and this will lead them to eventually building up a better entry price. This also means that their initial positions may undergo some periods of drawdown. This is why all individual positions are extremely small when they are compared to the amount of capital the traders put up.

Position trading should be limited to be used on assets whose fundamental sentiment is very clear, and that is most likely to be still continuing throughout the next few weeks or months. This trading strategy is signified by having not just the confidence needed to keep your position but also adding more to it.

Focus on Short-Term Performances Traders remain ‘active’ because, for them, there’s a very huge importance for the short-term activity of the market – the movements in the market provide immense opportunities for accelerated capital gains.

The style that a trader picks will determine when they look for trends in the market. Some do it within a few hours, some within a few days and others within a few months. A trader who looks for trends within the shorter timeframe is bound to be more active, and they will execute more trades.

Executing more trades doesn’t necessarily equate to more profits. Also, outperforming the market doesn’t mean that you’re maximizing your activity, but rather you’re maximizing your opportunities by using a sound strategy. A trader usually uses technical analysis tools to determine the best trade he should undertake and consequently the most suitable strategy. Buying and selling at the extremes might be an aggressive approach, but it may also be risky.

Outperforming the market or maximizing your returns isn’t just about making profits but it’s also about avoiding losses. The trader will always be conscious if a trade is about to make a turn for the worse, at which point he will decide to pull out and go seek profits elsewhere.

On the other hand, a long-term trader holds on to his investment regardless of whether the asset could be experiencing some difficult times. He has a lot of confidence in the value of the asset. He must also have a stomach strong enough to take some losses – losses that the trader avoids at all cost.