Candlestick Trading Blog
August 19, 2008
Trading Strategy
Trading Strategy – Do you have one? Every investor must have a trading strategy in order to succeed in the markets. Without a strategy, traders are destined to experience the emotional pitfalls associated with not having a plan. In finance and investing, a trading strategy is a predefined set of rules for making trading decisions. Whether you are a fund manager at an investment firm, or a retiree looking to make a few extra bucks on the stock market, you must define your trading plan. There are many factors to take into consideration when determining your strategy including, the return, risk, volatility, style, correlation with the markets, time frame, methods, and so on. Whether you decide to practice long term investing utilizing fundamental analysis or perhaps you decide to practice day trading using technical analysis tools, you must develop a trading strategy. Trading strategies can be carried out in two ways. You can either have an automated plan or a manual plan for carrying out your trades. Manual traders must be extremely disciplined in their approach and must not deviate from their plan. Traders that utilize the services of an automated trading system can construct a strategy that can be adjusted according to their trading styles, and they cannot easily deviate from their plan since it is built into the system. Many successful traders appreciate the help of the automated system because it keeps them on track with their trading strategy. Many investors also feel that manual trading allows the trader to deviate from their strategy which often reduces performance. Again, this is why the manual trader must be extremely disciplined in their approach. Hedging is an investing strategy that is used as a way of protecting an investment through the reduction of the risks that are involved in holding a particular stock. The most expensive hedging strategy is to buy put options against individual stocks, but basically hedging is the buying of a put option that allows the selling of stock to offset the risk of a decrease in the stock prices. The stock must be at a particular price within a certain period of time in order to do this. Investors are urged to buy a put option on the stock market because there will be an increase in the value of the put option once the price of the stock falls. This protects the investors from general market declines and beefs up their investment portfolios. Another trading strategy that is practiced is buying on margin. This is the buying of stocks using borrowed money. The money is typically borrowed from the stock broker of the brokerage firm used by the investor. Stop loss orders are used when buying on margin in the event that a stock loses it value. Stop loss orders limit the losses in the case of a market reversal. Buying on margin provides greater return on investments but it can also mean greater loss. Wise investors implement simple stop loss strategies to prevent from losing big. There are many additional trading strategies available to investors. The most important thing to remember, no matter the strategy you decide to use, is to do you homework first before you even think about investing in the stock market. There is potential to a make a lot of money, and conversely there is the potential to lose a lot of money as well. Research, practice, and use only the money you have to invest for your future. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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