Trading in the stock market is quite different than investing in it. Trading is a short-term game, while investing aims to earn you money in the long run. As a result, trading strategies look very different from how to invest.
Today, we’ll look at different strategies that can help you make money in the short-term by trading stocks (or other assets). Investing in stocks is generally a more passive strategy, while trading is by nature an active game, and one of the main differences between these different strategies is the time frame in which you buy and sell.
Familiarizing yourself with these two different strategies can help you become a market master, and once you’re familiar with them, you can start to determine which approach is right for you.
The Difference Between a Trading Strategy and an Investment Strategy
Simply put, a trading strategy is a game plan for how you buy and sell stocks in the short term to make money, and is a whole different beast than buying and holding, or long-term investing.
Long-term investing involves buying shares in an asset or company to generate future cash flows over time. Generally, you would invest in an asset for the long term when you think that asset is going to appreciate over time, or you would invest to reap steady income payments like dividends or income.
These investments can last months or even years.
On the other hand, trading is essentially flipping shares over a short-term time horizon (days, or even hours) in order to take advantage of price fluctuations. These price fluctuations are not necessarily predictive of an asset’s longer-term performance, but as an active trader, you don’t necessarily care about an asset’s longer-term performance.
Nevertheless, to be successful at trading stocks you need to have a battle plan, because it’s easy to lose a lot of money through stock trading. By having a trading strategy, you will better be able to make money in the game.
There are a number of different strategies for stock trading you can use. Let’s take a look at some of the common trading strategies.
Common Trading Strategies
1. Day Trading
Day trading is a famous trading strategy in the market often associated with the dot-com boom. The reason we call it day trading is because it involves flipping shares within the same day.
Day trading became quite prominent during the dot-com bubble. It was all the rage then, and while it may not be as popular now, you can still make significant money.
Like other strategies, day trading involves a heavy reliance on technical analysis, which looks at short-term micro trends in a stock’s price. It is different from fundamental analysis, which looks at the overall financial performance of the underlying asset.
For example, let’s say you buy some shares of Coca-Cola Co. (NYSE: KO) at a price of $40.50. If your technical analysis gives you a signal that the price is going to rise to $40.60 that day, you would sell your position when it does.
Ten cents may not sound like a huge return… and if you only bought one share, it’s not. But what if you bought 10,000 shares? You just quickly earned $1,000 – in one day! That’s why trading strategies like this can earn you an enormous return in a short period of time.
2. Swing Trading
Another one of the trading strategies is swing trading. Unlike day trading, swing trading involves a longer time horizon than one day. A position could be held for days or even weeks.
Swing traders tend to take positions based on activity around market trends. Specifically, swing traders look for when there’s a trend movement in one direction but looks to be reversing. This creates volatility in the price that a swing trader can take advantage of using rules or algorithms to predict price movements.
Swing trading is a strategy popular with those who are interested in active stock trading but don’t have all day to devote to the intense monitoring needed for successful day trading. While swing trading generally isn’t a full-time job, you do need to spend some time each day monitoring the market.
3. Position Trading
If you’re a particularly talented trader, you can use position trading to ride shorter term trends in the prices of particular stocks. Depending on your point of view, some people view this trading strategy as either a longer-term investment or a buy-and-hold strategy rather than active trading.
Position trading looks for stocks that have established an upward or downward trend in its price. Once that trend has been identified, position traders move into the stock and surf the trend until it breaks. Then they look to exit the position once they have identified the end of a stock price’s directional trend.
In order to do this, position traders can use a variety of methods, for example, studying stock charts over a short period of time such as days or even a few months.
Which Trading Strategy Is Right for You?
Every investor has their own unique attributes, skills and circumstances. There is no one-size-fits-all trading strategy, and in fact, for some people, active trading should be avoided altogether. Instead, they should pursue a longer-term buy-and-hold investing strategy.
But if you’re interested in short-term active trading, day trading, swing trading and position trading all have different advantages that could be valuable to you. The best way to determine which is right for you may involve some experimentation.
In the end, any one of these three methods can be a trading strategy that could help you make a lot of money in the stock market. While the risk can be high, the reward for a talented or dedicated trader can be even higher. To learn more about trading and investing, sign up for our free e-letter below. It’s packed with tips and research from investing experts.
About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.
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