Trading on the stock market is not an easy thing to do, and it’s sometimes difficult for novices to get involved with it. There is a lot going on, and the market tends to move very quickly, making it incredibly difficult to really understand the ebbs and flows of the market. However, if you try to think of investing as a holistic exercise in which you strategize based on how whole sections of stocks are moving and are willing to ask for some occasional help, you can actually start to predict the changes and learn to really make money. Here are some great strategies you can employ.
1. Breakouts – This is a way to take advantage of the inertia that comes with a stock moving up or down. The premise is to look for investments that are trending one way or another, and try to predict whether they will either break past their previous highs or lows. The way to do this is by establishing certain prices at which you would buy or sell these stocks during their trend that are either just above the recent extreme high or just below the recent extreme lows. Very rarely do prices stop on a dime, so there is a good chance that if a trend is developing, that the stock will continue on past its recent extremes and leave you sitting pretty because you were able to recognize it.
2. Retracements – These can be tricky, since they are related to Breakouts in that they are a part of a trending stock’s tendencies, however they are not always clearly defined. Basically, when you have a stock that is trending up or down, there is usually a period when it starts to go in the other direction for a little while. This isn’t actually a reflection of anything the company is doing. It’s a change caused by people who are now either buying more of this stock or selling it off in an attempt to make money on their trade. This could be seasoned investors getting nervous about something that is ultimately meaningless or it could be novices who have just made a few dollars and want to get out with a small profit. Regardless, paying attention to these can be a good indicator of when you should buy or sell before it settles out.
The only thing to be careful of when it comes to Retracements is that if you can’t identify why a stock is suddenly going in the opposite direction, don’t assume it’s time to employ this strategy. Sometimes stocks just reverse, so know why it’s behaving that way before you risk your money.
3. Reversals – This is a strategy for the more technical minded investor who excels at understanding the various mathematical factors that go into investing. More to the point, trading reversals is something that you do when the market is showing no clear trend, nor are any major announcements from companies or monetary policy makers expected. If the Chairman of the Fed has a press conference that day, you shouldn’t be trading reversals. Otherwise, the basis for Reversals is that you are taking previous data and statistical “constants” and using those to determine where the next bit of activity is likely to come in.
4. Momentum – Unlike Reversals, Momentum-based strategies aren’t predicated on precise knowledge of potential movement. Instead, they focus on developing trends and wide swaths of movement. These are the types of strategies in which you have to be aware of the world and what may affect business in various industries. New regulations on importing, changes to interest rates or scandals involving them, geo political strife or settling can all be a factors that cause massive changes to dozens of industries. Momentum-based trading takes advantage of that and invests in order to get the most out of the reactions to events.
There are other ways to approach stock trading, but these are some of the most popular for good reason. They aren’t all for novices, but they can provide a good sense of how the stock market works and how to make your entrance into it successful for many years to come.