As the New Year has officially begun, it is the perfect time for investors of all varieties to reevaluate their overall strategy. The ending of 2018 was particularly volatile which, though this may be indicating the emergence of some long-term economic issues, has begun to present traders with a wide variety of lucrative opportunities.
There are many different things that will need to be considered when developing a trading strategy including your willingness to accept risk, whether you prefer shorter or longer positions, and the ever-changing conditions of the market as a whole. Many of the world’s most successful investors use multiple different approaches when developing a lasting strategy.
While most traders are well aware of the “buy low, sell high” principle, this is really only just the beginning of what you ought to be considering. In fact, in order to truly earn a significant return on your investment, you will need to pay careful attention to when these high points and low points are actually beginning to occur.
Fortunately, by monitoring some important details and patterns, developing a successful approach to trading is likely something that is well within your reach. In this article we will discuss some of the most popular trading strategies for the year 2019 and how these strategies can be effectively used to improve your rate of return.
When it comes to monitoring the stock market (or any market, for that matter), there are generally two different types of analysis that you can use. While technical analysis involves carefully monitoring the quantitative performance of stocks and the market as a whole, fundamental analysis will also account for events occurring in the news.
Fundamental analysis derives its name from the fact you are looking for indicators that the fundamental value of an asset has actually changed. For example, if a company experiences a scandal or sudden change, this will likely be directly reflected in the value of the stock—opening a short position before the market can react can be very rewarding.
There are many things you can do to be an effective fundamental trader. Actively monitoring the news, getting alerts about certain companies, and engaging in certain “contrarian” trading practices can all be quite useful. It will also be important to pay attention to the major indexes (DJIA, S&P 500, etc.) as well national economic indicators such as GDP growth, employment, and others.
As the name might imply, volume trading is a strategy that involves not only monitoring the price of a given asset, but also monitoring how often (the volume) that asset has been traded over time. There is certainly a strong relationship between price and trading volume, but paying attention to the nuances between them can help you see the bigger picture.
Volume can be used to indicate multiple different things. Some volume movements may indicate that a reversal is about to occur, meaning that the likelihood of opening a profitable position has increased. Other volume movements may indicate that a long-term trend (such as a general price increase) is beginning to slow down. By paying attention to changes in trading volume over time, you may be able to identify authentic price movements before they have begun to actually occur.
In a vain similar to volume trading, momentum traders seek to open a position before the price is about to increase and exit a position before the price is about to decrease. Because many lasting trends demonstrate similar behaviors before they have materialized, paying attention to the general momentum of a stock is something that is very useful.
Momentum trading was largely developed by Richard Driehaus, who is recognized as one of the most successful traders of all time. The strategy has been described as “buying high and selling higher”—in other words, momentum traders wait until a stock appears to be already in motion, but still manage to open a position before the momentum of that stock has been lost. Momentum trading indicators may include changes in trading volume, changes in volatility, widening bid-ask spreads, Bollinger bands, and many others.
Using Stop Loss Orders
It has often been said that there is no such thing as a risk-free investment. While this statement is undeniably true, there are still certainly many things you can do to decrease your exposure to risk while still maintaining an opportunity to earn strong returns.
Stop loss orders are used to help minimize the amount of money that you can possibly stand to lose with a certain trading position. If a stock is currently valued a $100, you may want to consider issuing a stop loss order at $95, meaning that if the price ever drops below that amount, you will automatically sell and exit your position.
On the other hand, a stop limit order enables you to “cash out” once a stock has increased a certain amount. Using stop losses and stop limits simultaneously makes it possible to lock-in your earnings and also cut your losses when appropriate. Though it will be possible to revoke these orders before the limits have been reached, they are still considered one of the most time-tested risk management tools in the world of trading.
Because of the possibility of shorting stocks, risk-tolerant traders may be able to earn returns on their investment regardless of whether prices are generally increasing or decreasing. What true day traders ought to be actively looking for is whether or not movements have been generally volatile—this will have a direct impact on how much you can potentially stand to earn in a single day.
Volatility trading involves actively monitoring how volatile a stock has been and opening a position accordingly. Volatility is often used by momentum traders as well, due to the fact that this one of the prime indicators that a major price change be beginning to formulate. However, though the fundamentals of volatility trading are obvious, it is also important to note that these stocks are inherently riskier. Volatility traders will ideally be risk-tolerant, willing to trade at high volumes, and willing to open and close positions in a short amount of time (day trading).
If there is one principle that has truly withstood the test of time it is that diversification is the surest method for reducing asset-specific risk. Diversification is the prime strategy of passive portfolio managers around the world, but it should also be considered (at least to some extent) by active day traders as well.
There are many different ways that you can effectively diversify including diversifying assets, currencies, markets, industries, directional positions (short versus long), and stop orders. You may also to consider investing in asset that usually have a reverse correlation with each other as well—this way, no matter what direction the market may be moving, you will find yourself in a position where your exposure to the risk of the unknown can be effectively managed.
Clearly, there are many different strategies you can use to help reduce your portfolio’s risk while still maintaining your earning potential. Very few of these strategies are mutually exclusive and, in fact, many of them may even complement each other. By paying attention to market and asset-specific trends and by effectively utilizing these trading techniques, you will be able to take advantage of this somewhat uncertain market and achieve your earning goals for the year.