There’s a common myth about trading techniques. As you hear it told, there are only two or three ways to go about the discipline of selling and buying securities. In reality there are probably hundreds of unique ways that people have come up with, many of which are hybrids of the five or six primary strategies for profitably taking part in the securities markets. In addition to two of the oldest ways, fundamental and technical, there are many others. Some are based on the availability of new technology, widespread knowledge of the exchanges, and an overall higher sophistication among those who decide to put their money at risk. Here’s a brief look at some of the most popular methods and guidelines that people use to protect their capital and continue making money by selling and purchasing securities.
Fundamental analysis focuses on the inherent characteristics of a corporation, like its management team, its products, and recent news announcements, new contracts, or lawsuits. There are some numerical components of fundamental analysis, most often expressed as financial ratios like earnings-per-share and outstanding debt figures. Anyone who favors fundamental analysis tends to view the people, products, services, and current solidity of a company as being much more relevant to its future share price than anything else.
Simply put, technical analysis involves a good deal of mathematics. But, don’t worry if math isn’t your thing. All the heavy lifting has been done for you and is included in built-in apps that measure things like moving averages of prices, divergence points from those averages, volume indicators, and more. In fact, there are excellent guides on how to trade online that can get you up and running with technical analysis very quickly. Most people use a mixture of fundamental and technical analysis, so don’t expect to rely on one or the other 100 percent of the time. Often, it makes better sense to rely on fundamental analysis for very long-term investing. Technical analysis tends to work better in shorter time spans, but everyone has their own preferences after they learn the ins and outs of both.
Price Action Strategies
As opposed to relying on fundamental and technical indicators, price action enthusiasts look at minute-by-minute dollar values of a security, noting whether there seem to be any obvious trends or patterns in real time. They often don’t use technical indicators like moving averages, MACD, or others, instead opting to simply make subjective decisions based on actual prices. It takes experience, confidence, and a solid knowledge base to use this method.
Finding Your Own Style
After a few months of buying and selling, most people gravitate to a particular style. Some end up using technical analysis almost exclusively in the beginning because of its objectivity and math-based decision process. Others prefer reading in-depth reports about corporations, studying the news, and selecting stocks based on qualitative information. There are endless mixtures and hybrid techniques, and everyone ends up favoring a certain way of doing things. Some say that the style will find you, rather than you finding the style.
Why Timeframes Matter So Much
Time horizons dictate a lot. For example, people who are engaged in building retirement portfolios can afford to look at a vast time line, ignoring temporary market fluctuations and paying more attention to the strength and reputation of a corporation. At the opposite end of the spectrum are day traders, who live for the current session. They care little about management teams and most of the other fundamental factors. Instead, they watch minute-by-minute prices and the daily news. Medium-term and swing traders use a mixture of those extreme strategies in order earn profits on a monthly or quarterly basis.
If you prefer to trade nothing but tech companies, or only buy shares that are priced below $10, or purchase the shares of a single company, then you fall into the specialist category. Many day traders, for instance, are specialists by definition if they buy and sell the stock of just one or two companies. There are all sorts of niches you can choose, the most common ones being the general categories of the market, like technology, healthcare, financial services, industrial, and more.
There’s an active group of investors who focus on shares that pay regular dividends. Their strategy typically aims to reinvest all paid out dividends into incremental shares of each company. They make use of special programs called DRIPS, or dividend-reinvestment programs, which are popular ways to grow IRA’s and other long-term accounts.