List of short, long term and other types of investment strategies for beginners and even retirees

People are different. Their personal differences influence their work, leisure time, long and short term goals and even the ways they invest. A lot of folks want to find out the best trading strategy and they spend a lot of time in various investment and speculation forums browsing through various trading that are there. From my personal perspective I can say that you have to spend some time experimenting on a few strategies before you finally find something that you feel comfortable with and the one that gives you a satisfying return. Some have too unrealistic expectations regarding trading and practicing various trading systems will open their eyes to the fact. It will take time for you to master various aspects in this or that system, but when you will finally do you will be able to introduce various filters that will help you to filter out various false signals pertaining to your trading strategy. Let us look through some of the best known strategies with their advantages and disadvantages. 

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The most famous ‘buy and hold’ way to invest

This is probably the best known and talked about investing strategy, which has been losing its’ attractiveness lately. The one who practices this type of trading system would keep his investment portfolio the same for years without making major changes. Warren Buffet would probably be the best example of a person who buys and holds his securities for a lifetime. The idea with this trading method is not that you buy some shares and forget about it. No, you would periodically buy more of the same kind of securities (adding to your position). Traders who use this way to trade believe that markets will continue rising even after the worst possible collapses and the best companies or goods or any other types of securities will recover and those who invest in them will prosper long term. Having made right choices one might become incredibly rich within a decade or so. 

However, there is a dark side to this type of investment too. If you do this with high leverage and in a down trending market you might lose all of your money. Even the best companies may go bankrupt in a period of ten or fifteen years. Do analysis and you will see that it is very realistic. Some shares that gave traders millions of profits years ago are no longer on the stock exchange. You will have to spend a lot of time studying companies and their future perspective to compete in the global market long term and only then to make a decision to buy the shares of it and hold. However, remember that there is no such thing as good as secure investment nowadays. What is good today might be worthless in a few years time. It may actually become a good ‘sell and hold’. 

Dividend investing method

This way of investing is based on buying the shares that have high yield dividends. One would have to look through his investment portfolio about one time a year. A trader using this type of trading system expects that other traders will notice these high yielding dividend shares and start buying them and as a result of this the shares will rise. There are a variety of approaches to this way of trading. Some would select the best stocks of Dow, choose ten that give the biggest dividends and hold them for a year. You have to re-invest the dividends that you get though. You have to learn how to make money from the rise in these stocks, because merely getting dividends for one year may not be enough to cover losses if you entered market at wrong time (as well as taxes, transaction costs and a few other things).  Dividend trading system is quite similar to carry trades in Forex market. By this I mean buying those currencies that have high interest rates against those that have very low ones. This could be buying AUD against JPY or NZD against USD. You make some money just by keeping your long position for some time. If you want make big money you need to learn to predict price action in advance and go with the trend from the moment it starts. 

Investing in indexes strategy

Depending on your investment expectations investing in indexes might be a good trading system. We know that if you simply buy indexes such as “Standard & Poor's 500”, Nasdaq Composite or NYSE Composite you will mostly outperform most of investment funds. Those that initially introduced this investing strategy assumed that markets are effective and you will surely get your return sooner or later. Unfortunately, most recent volatile moves in the markets make one doubt safety of such a system to invest into markets. One could mix it with the two above trading strategies as well as the principle of buying low. 

Investing into certain market sectors system

Everybody knows that concentration is key to achieving success wherever you expect good results. Those that are not satisfied with average results and want bigger returns will have to concentrate specific market sectors: medicine, finance, tech, growth or value stocks and etc. This again will work best if you find the bottom after a fall in a sector and start buying from there. Technical analysis (support and resistance) might help you to do this. On the whole, you will be able to achieve extraordinary results if you learn how to identify potential lows (where you should start buying) and highs (where you should get out of the market). 

Value investing technique

This type of investing is a prerogative of fundamental analysis. Investors want to buy shares that are undervalued according one or a few factors of fundamental analysis. Unfortunately, it is not easy to decide which fundamental aspects are so important that they have to be taken into consideration in terms of investing. Some stress some things; others see importance in other factors. There is a popular way of saying that stocks are undervalued if their price is lower than total price of all assets that specific company has. However, nowadays most investors would disagree with the idea. More and more investors would say that intellectual power as well as progressive work force is no less (maybe more) important than material assets of a company. They tend to pay more attention to P/E ratio (price earnings ratio) to decide whether the company is undervalued or overvalued. 

Growth investing as opposite to value investing

A growth investor would not concentrate on whether the company is undervalued and does not reflect the real value, but on fast growth of a particular company he is interested in. Growth of a company is usually determined by studying how fast a company grows its’ profits and income. The key here is not only to find a fast growing company, but also the one that has not exhausted its’ growth potential yet. Those that are not trained will probably notice a growth company at the end of its growth and expansion. That’s what the crowd usually does. It joins the move at the end of it. You have to notice a potential where nobody sees it yet. 

The problem with investing in growth companies is that you never know when the growth will stop. Investing in a company that has been growing for over a decade maybe risky, because it can be at the peak of its’ growth. When growth investors start feeling that the company has exhausted its’ potential they start closing their positions and shares of the company collapse. They company might try to lure investors by offering attractive dividends, but it will probably not tempt growth investors to come back as they are interested in profiting from a growth of a stock, not from dividends. They risk more, but they also reap more. 

Investing into securities that you understand

By this I do not mean only investing methods that you understand, but the companies which you understand, trust and believe have a potential to grow. If you work for a company that is on the Stock Exchange you are surely aware of the state your company is in: profits, strategy, marketing, sales and possibly future perspective. This may lead you to invest or refrain from investing. Avoid companies that you do not understand. If you are not a tech guy you would probably not tech stocks. Of course, if you are a trader that follows technical analysis, looks for areas of supply and demand you could probably trade any security you want. 

If you are an investor you should learn to concentrate on markets or market sectors that you understand. If you understand what influences oil prices you might consider doing analysis of all major oil stocks. Then picking those that might be undervalued now and have great potential to grow! You can also do analysis of various commodities and decide which ones you want to invest to. However, you should not invest only in one type of stocks, but try to diversify. But be sure you know what you are doing! 

Speculating, day trading and scalping

People have been speculating in the markets for a long time. A speculator tries to profit from price fluctuations and he will never apply strategies such as buy and hold or invest into companies just because they pay big dividends. No, they want to see change in prices and benefit from that. At the sight of the slightest market reversal a speculator would run out of the market like a thief. Well, I am exaggerating a little, but a smart speculator would never watch his profits being eaten by market sharks and doing nothing. He would move his stop in the direction of a prevailing trend till his stop is taken out. Day traders would not bother keeping their trades open for more than one day’s session. And scalpers could open hundred positions during the day. As you may understand this kind of trading strategy requires a lot of skill. I haven’t heard of many who are able to do it.



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Final thoughts

Investing requires skill, goal setting, understanding of one is doing and a lot of patience. Success comes only when one is ready to handle it. Investing community has a lot of traders who practice various investing strategies and you will find very successful investors who are follow fundamental analysis as well as those who rely on technical. Although they are different anyone who wants to have long term profits has to cut one’s losses and increase one’s profits. Have this in mind when you will be considering which investing strategy to choose. 

Good luck trading. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Vytas.

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Top 8 stock trading tips

My experience of stock trading began in 2003. I read some small book on the topic and got fascinated by the opportunities that were there for me in trading stocks. I started trading on my native (Lithuanian) stock exchange by buying and selling stocks that seemed to be cheap. Unfortunately, they got even cheaper and having reached the ‘then’ bottom stagnated for a long time. I understood that something was wrong with my approach as I saw other stocks going higher and higher. 

One day a friend of mine introduced me to his brother who had been investing in the same market for a few years. And he did have tremendous results. I looked at his portfolio and saw around 5 stocks all of which had risen more than 100 hundred percent from the time he had bought them. I was surprised to see that as 3 of the stocks were agricultural companies. For me, it seemed not a very intelligent decision to invest in those. 

When I asked him about his choice, he took out some three pages full of pros (his why’s) for investing in the companies. This shocked me even more. I was very naïve at the time. I believed I could just look at the prices of stocks, read a little about them and pick up the one stock that will make me a lot of money. I was wrong and results confirmed that. Understanding the market and fundamentals was necessary for profitable investing. This was confirmed again when I started trading Forex and lost my initial balance of 500 bucks in a few months. Yea, it takes some time and painful experience for dummies to become wise. 

Understanding of investing principles as well as fundamentals of a given market is a must for one to become a successful investor in any market. You will soon learn too, whether it is day trading or long term trading the statistics remains the same: 99 percent of those who trade finally fail. Why? There are a lot of reasons for that, but most fail to look at investing as a business and this light attitude causes them to fail. 

In the article I am intending to present some of the most general stock trading tips that would help one understand what one should and should not do when one starts investing. This is the first article of the series that I am going to publish once a week. Hope the posts will be useful both for newbies and for more experienced ones. So, let me start.



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1. Do not try to predict market tops and bottoms

Some rephrase it by saying that you should not try to catch falling daggers. Those that try to guess where the market will make a bottom can start buying too early and in a severe downtrend they will experience severe losses. They same will happen if one tries to predict a possible market top and start selling too early. The top maybe formed after a year or two or even ten years. What will you do then? Keep to a losing position? So, do not try to make these predictions in the first place. Let market give signs about a possible reversal: ranges to start (prices fail to make new highs or new lows). 

I remember how in 2004 eur/usd (Forex market) pair was in range of 500 points. Finally it broke out and started running up. I used to spend a lot of time in various Forex forums at that time. I remember one trader who was always recommending selling eur/usd at the time. All on the way to the top he was opening selling positions. He used to say that all sound traders had already left ‘this insane uptrend’. However, market did not pay attention to his ramblings and continued upwards. Market does not care about your opinion. You should learn to listen to what market ‘says’ and follow it faithfully. 

2. Do not follow too many stocks, concentrate on a few

I initially learned about the principle in the book “Reminiscences of a stock operator” that is full of insights of one of the best speculators of all times – Jesse Livermore. The problem with following a lot of stocks is that you can never know everything about each stock and if you divide your focus on two many stocks you will know enough about each one of them. You need to focus and invest all of your attention on a few stocks.

You can initially start analyzing indexes by sectors, then selecting one which you understand best and from that index choose three, maximum four stocks which you follow and trade them when opportunities occur. You will also find out that this is how professional investors and analysts study markets and pick out the best stocks for investment. 

3. Cut losses and let your profits grow

It does not matter how great you are as a trader you will still be making mistakes and most probably half of your trades will be good and half of them will be bad. The same is valid for real professionals. They do make mistakes, but they know how to take advantage of opportunities and to maximize their profits in these situations. Cutting your losses is simply admitting that you have made a mistake and now you are ready to wait for better opportunities. 

It is pretty difficult as most traders see their losses as something personal, so they tend to sit and wait for their losing positions to turn profitable. In this way you can hold a stack of losing trades and continue closing good trades. It should be the other way round. Close the bad ones and continue holding the good ones. 

Before one opens a position one also has to decide how much he is going to risk. For some it may be 2 percent, for others 10. It depends on the nature of trading. Those who day trade should not risk more than 2 percent of their equity. Those who invest can make it as large as 20 percent. The less your risk the better! And your potential profit target should always be bigger than your potential loss.

4. Buy the rumor and sell the fact

That is another famous axiom of Wall Street. Those who are experienced often predict that the upcoming fundamental news will be positive and they buy the stock in advance. When the news comes out they sell the stock as the positive news that comes out is already ‘priced in’. And if the news is bad they might take a ‘short position’ in the stock. 

What kind of news we are talking about? Any fundamental news connected with the company: merging, introducing new product to the market, closing some department or quarterly financial results.

However, one should also be aware of the multitude of rumors that circulate in the market daily and one should rely more on his own fundamental analysis and not on some unreliable information coming from ‘God knows where’. 

5. Do not follow amateur tips

There is a saying in Wall Street that ‘when taxi drivers start giving tips it is time to sell shares’. Tips are abundant in financial markets. You can get a lot of those on various financial TV programs. But those people usually retell what they have heard others saying or even worse they help somebody to get rid of the shares that have exhausted their potential and are ready to fall. This also applies to the so called ‘market gurus’ that give out their tips right and left. Do not trust them. Become a pro analyst yourself. 

It is in their nature of people to tips. Most probably, it comes from our unwillingness to do serious analysis by ourselves and trust somebody else’s opinion. We also avoid personal responsibility by doing so and place it on the shoulders of others. 

6. Take profits when the stock is still rising

We know that no stock goes up all the time. The same can be said about stock indexes and all the rest securities. Times for correction do come. And not only for correction! Companies do get into trouble and their shares collapse. So, if you want to make profits in the market learn to take get out of your position while the stocks are still going up. 

It might be difficult to do as traders often ‘fall in love with their stock’ that is doing well. If you are not simply playing for fun, but intend to make money from your trades it is better to untie yourself emotionally from the trades you make and close your most profitable positions when they show you decent profits.

7. Get out when everybody is bullish and get in when everybody is bearish

You should always distrust the crowd. When any market becomes ‘one sided’ (everybody is a bull, or everybody is a bear) you should take the opposite direction than the majority of people take. If all newspapers, newsletters and ‘experts’ start telling that this stock, or commodity or currency will rise for years to come the days of the bullish move are counted. The same is true about bears. When everybody is bearish the days of bulls are about to start. 

8. Buy in October and sell in May

This can be modified slightly and buying can start at the end of summer. Why is this so? Nobody could tell you exactly why this is so, but it simply works. Most money in the stock market is made from November till May. Then stocks usually start going down. Summer is often for corrections, but at the end of summer you might start looking for cheap and prospective stocks and start buying them bit by bit. 

You do not want to buy at inflated prices as this is contradicts the main rule of investing ‘buy low and sell high’. Investors do take profits and end of spring has become a traditional time to do it. You should have in mind the rule when thinking about the place of exit for your trades.

Final thoughts

Investing in stocks is not gambling. There are rules that you have to follow and important things that you have to know. The article covered some of the points that had to be in mind before one decides to take a position in stocks. Nobody becomes a profitable stock trader over a night in the same fashion as nobody becomes a good doctor over a night. Good things have a good price tag on them. Look at this occupation as a business and then decide whether it is for you to get into it. Next week I will continue the topic. Hope the article was helpful. If it was I would be grateful if you tweeted it, liked on Facebook or any other social media. Thanks for reading. 

Read my previous posts:

Why buy gold

Best Forex trading system
How to make money trading

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.