Stock trading strategies
There are two main strategies concerning both stocks and any other assets:
If you can understand that, you may open a brokerage account. But if it is the only thing you understand, you should refer an additional literature concerning trading strategies.
Investment wisdom says: “You can invest as much as you can afford to lose.” Then why do we need strategy? The answer is simple: we cannot afford ourselves to lose money. The strategy does not guarantee you from losses but it decreases its probability.
Let us view how people trade without strategy: Imagine, that at the day you had entered the market XYZ stock used to grow. Certainly, you have decided to buy it. In some minutes you bought it the market began to fall. To avoid increasing of your probable loss you sell your XYZ shares. You had not even known that any sharp growth is followed by “correction”. The correction occurs because traders who had been buying growing XYZ stocks after some period of growth wishing to fix their profit begin to close their positions on XYZ stocks. The same thing may occur when you selling stocks “short” at the falling market.
When next time market will change its direction you will probably think that it is correction. And if it is not (traders may close their positions due to fundamental factors which predict a new trend for a long period of time) your loss will increase again.
To avoid any losses caused by your rush while market is moving anywhere you should define some principles of taking trading decisions. This will be your strategy.
As you can see having your strategy is quite important. And there are two types of factors, which affect price and your decisions as well:
Fundamental factors affect price in long- and middle- term periods. These factors were reviewed in different economic theories related to Macroeconomics.
Example: interest rate. When it increases stock price decrease because investors will prefer higher profit for lower price (i.e. risk).
Technical factors can not be recognized as factors as well. But in short- term period they can help you with definition of future moves of the market.
Example: if the probability of correct prediction of the next movement of price by means of linear regression is higher than 75% you can try to predict price using linear regression.
Also there are mixed factors which ca be recognized both as technical and fundamental ones.
Example: short- term interest rate is a fundamental factor and a technical one at the same time as it acts in short- term period.
If you wish to create your own trading strategy you should find the combination of these three kinds of factors according to your aims.
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