Stock market trading strategies

Investors that know and understand trading and trader thinking are also better investors. That understanding informs them and helps determine their approach to all markets. Experienced investors know that traders and trading take up most of the stock market space and volume. Traders count for most of the market action, get most of the media attention and produce most of the market noise.

Financial services promote and encourage trading because they make most of their revenue from trading activity. Wise investors know the trading noise and most market media reports are about or because of trading. Those investors know that most of the noise and reports are not relevant to making money as investors.

Traders know the playbook

Experienced knowledgeable investors can read the playbook of the biggest market players and traders. They begin by knowing the strategies used by the big players as the place to begin learning. That knowledge gives them an advantage which can be used as investing fast lane trades.

But not always to follow the same strategy. Rather, investors learning from the market behavior, grow in knowledge and understanding of stock markets and investing. Investors, speculators and traders all must manage risk, time and their goals to make the right decisions.

Traders keep risk in the middle

The risk approach of traders lies between conservative investors and aggressive speculators. Investors seek low risk, speculators tolerate high risks. Traders seek higher returns, sooner than investors but not at the higher risks speculators accept when seeking faster and greater returns.

Those risk profiles overlap. when considering the broad range of basic stock market approaches. Within each basic strategy endless refinements and variations can provide enhancements.

Traders need movement

At a minimum, trades need both an increasing price for the stock and an increasing volume of shares traded. Simple basic trading plays buy a rising stock that, on most days, continues rising or trending to ever higher prices.

Those are the typical investing fast lane trades and profitable momentum trades that get sold out at higher prices. Most such plays unfold over a matter of weeks or a few months; very few extend longer than a year.

A momentum strategy can be characterized as buying high to sell higher. This approach sharply contrasts with the buy low sell high mantra of a value investor who always seeks to buy at very favorable, as in low or below value, price to begin with.

In contrast when markets are rising, the momentum stock market trading strategy buys in with little or no concern about getting a low price to open the trade but does seek: 

1. rising share price

2. increasing trading volumes

3. increasing order counts

4. more investors buying

When price, volume, trades and investor interest all increase we have the making of the best momentum plays. When that happens to many, and not just a few stocks in a market, the collective momentum powers both the market and stocks to ever higher price levels.

Momentum Caution Stock market trading strategies

When actively using stock market trading strategies it is easy to get caught up in the exciting emotions when strong price movements happen in a bull run. Riding such a run can be very profitable but such runs, like any stampede, can quickly turn, become dangerous, and do serious damage!

Alan Greenspan, former Chairman of the U.S. Federal Reserve Bank famously called such times “irrational exuberance”. “Bubble” is another more common description of any market carried away by momentum. Any “we can’t lose” greed driven market always ends badly. Bubbles always burst and markets do fall.

Momentum plays depend only on stock price movement

Momentum gives no regard to value, income or even if the company has any revenue, let alone profit. Simply seeing a high stock price or one rocketing higher can never be taken as any sign of value. But is can be a great momentum trade if played well. Be careful should this "easy money" tempt you to reach into your pocket. Smart investors must always do their due diligence first.

Yes, first...do your homework beforet, not after you invest. Remember, when trading momentum, the music will stop and the party ends. When the buyers disappear, someone gets left holding stock and not profit. To profit, you must sell and do so at a higher price to take home any winnings.

To wrap up a trade most profitably, selling at or near the top is important. Obviously, someone has to be buying when you want to sell. That means making a profit requires selling and leaving before the party actually ends.

You must sell to win

Exiting the trade before the herd loses interest can get very tricky. Experience and knowledge helps an investor play such trades. However, achieving that level of knowledge and experience takes much time and effort. The price of gaining that experience can be very high.

A new investor must get experienced help before considering using any trading strategy. You can learn to trade. You can learn to play momentum; just don’t be in any hurry to test your skill with any but minor trades. Never confuse luck with skill; luck is great, but not dependable!

Whenever a deal tempts you to jump on without doing homework, think first. There will always be other opportunities to make a profit. In markets, there is no such thing as the last bus. You may have to wait, but there is ALWAYS another bus. Catching the next profitable ride is far easier, less stressful and many times more profitable than making up a loss.

Profits can come quickly

Momentum plays can end in a few weeks but most last 2 to 6 months. There are many exceptions and many false starts. The fast action and large profits are the big appeal. The danger being that our greed overcomes our brains when investing fast lane trades promise us profit.

Some rising stocks that begin as momentum plays can have bull runs that last considerably longer. This occurs when business operations, growth, value and earnings of the company support the higher stock price. Those are rare but exceptionally profitable plays. They can begin as high risk speculations that evolve into momentum trades. Some few mature into spectacular growth companies! For example, Apple anyone!?

Trading bits of market wisdom

Bits of market wisdom include, “it takes all types” and “there have to be buyers and sellers”. These bits of wisdom point out the obvious. We can’t buy if nobody wants to sell and we can’t sell if nobody wants to buy.

Trends can end as quick as a blink. Most often when a strong trend ends, the change happens fast. Most times a fast change also comes with a reversed trend. That is the swing trade opportunity. Alert traders can do well by moving early, but only profit when they are right! Should they get it wrong, losses grow large and fast!

Sellers smarter than the market?

Every market has an endless supply of traders that are smarter than the market. Or at least they think they are. They always remind me of the old real estate story that everybody has heard. The seller who knows more than the market and sets the selling price too high.

For good reason, realtors ignore those sellers. Few buyers consider paying over a fair market price. So unable to find a buyer at the too high price, most realtors pay no attention to such listings which are not a realistic offer to sell. Any realtor can tell you several stories about such so called sellers.

The solution to their problem is obvious. If they want to sell, price the property at or near the market. Sellers must accept what a prospective buyer will pay or they remain the owner. Realtors, agents or financial advisors are not the problem when a seller has an unrealistic or even stubborn price expectation.

Traders dance on liquidity

To work well, market forces need volumes of shares, buyers and sellers. Trade volumes must be high enough that an individual trade does not cause big price movement. Traders also need to accept the pricing by market forces as fair.

Good traders are pragmatic and realistic. When they are in a losing position, rather than stubbornly hanging on, they take the loss and move on. They free up capital and move on to seek their next profitable trade. They do not sit on a losing position. Clear mistakes fast.

Who and what awaits in the market?

The market lets anybody in. That includes you, me and anyone else interested in being there. It is a public market and that public includes people you may not socialize with, care for or about. But to trade well, you must get to know the cohort that hangs around any market.

That is not saying you need to know them personally, rather you need to observe market behavior enough to understand it. Trading well takes some time to learn and is best understood with a knowledgeable experienced guide.

You need to know that markets do have liars, cheats, corruption and belligerent behavior. You do not need to participate, but you do need to be realistic and aware not everyone plays fair. There are lots of trading charlatans hanging around markets. Greed, fear, panic, slippage and poor decision-making are market regulars. This cohort shows up every single day. Successful traders know how to deal with them.

Investing is a heads up adult game. Inform yourself, think for yourself and learn how to play it well and safe to keep it profitable. Trading stocks can make serious amounts of money. Doing it well on a regular basis takes time, knowledge, and experience. It is not a game for beginners.