Candlestick Trading Blog
November 20, 2009
Stock Market Trading Strategy
| All investors must have a trading plan that contains a stock market trading strategy that works for them. It doesn’t matter if you are trading forex, commodities, options, or any other financial instrument, you must have a trading plan. When studying investing and finance, a trading strategy is defined as a predefined set of rules to help investors make trading decisions. In today’s article we discuss shorting stocks, as a stock market trading strategy, as well as leverage and margin trading and hedging. Shorting stocks is a stock market trading strategy that requires the investor to borrow funds in order to invest. Also referred to as short selling stocks and selling short, the goal is to invest in a stock in anticipation that it will decrease in value. Yes, you actually want the value to decrease. This is the opposite of investing in stock where the goal is to the see the value of the stock increase. Many investors have a hard time at first understanding this concept; however once there is a basic understanding it is not so complex. How it works is the trader borrows money from a broker for a specific number of shares. The trader sells those shares and once the price goes down in value, the investor buys the shares back. Then the investor returns the same amount of shares to the broker at the current stock price (or cheaper preferably) allowing the investor to keep the difference. Another strategy that works is leverage and it goes hand in hand with margin trading. Leveraging is the borrowing of money to make more money. Basically, when you place a trade with your own money, and then add the borrowed money, you can potentially double your returns. This is called buying on margin, and is of course risky, because you also can potentially double your losses. That is why you must be sure you know what you are doing before you practice margin buying. Hedging is the last stock market investing strategy we will discuss today. A hedge is an investment that is taken out in order to reduce or cancel out risk in another investment. Techniques that are used in hedging involve the use of derivatives, which are considered by many to be complicated financial instruments. The two most common types of derivatives include futures & options trading. Another method of hedging is the use of hedge funds. Hedge funds pool investors’ money together and invest those funds in a financial instrument in attempts to make a positive return. Now that you are aware of stock trading strategies, continue to learn about more strategies and develop a stock trading plan that works for you. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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