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Basic Stock Trading Strategies
by Carmelo J. Montalbano
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Overview
Basic trading strategies include both fundamental and technical trading tools. Most investors quickly learn that a good trading strategy is pre-determined before the trade has been made. Hundreds of well proven trading strategies exist. Remember that even a good trading strategy will only be right about half of the time. Trading strategies must include diversification, loss limits and historical testing of a strategy before money is invested.
Trade with the trend until it bends.
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Fundamental Analysis
Fundamental analysis can be used as a trading strategy when the value of assets minus all liabilities is less than the stock price. On some occasions stocks will trade below the amount of cash on hand. Other popular strategies include buying stocks with a low price-to-earnings ratio or stocks showing steady dividend increases. Be wary of stock splits, particularly if a stock has multiple splits in a year. It may be a sign of frothiness in the price. For customers willing to enter into margin plays, consider options. Covered calls offer little market risk, yet produce high levels of income. Fundamental strategies are big picture strategies for long-term investors. While accurately describing the financial condition of a company, fundamental analysis does not offer good market timing for purchasing investments.
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Technical Analysis
After finding a stock with fundamentally sound features, use technical indicators to find good entry and exit points for a stock. Popular techniques include buying a stock with increasing earnings once it penetrates the 200-day moving average. Exit the stock when the 50-day moving average falls below the 200-day average. Use stochastic indicators such as the MACD to buy and sell when the indicators exceed or fall below the zero line. Very popular is the use of dual moving averages. Buy when a short moving average moves above the longer term average. Sell when the moving averages reverse. The triple moving average system adds a third, very long moving average. Prices must be above the long average before the other two averages come into play.
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Basic Entry and Exit Trading Strategies
Trading strategies live and die by the discipline a trader uses. Traders learn that not every trade will succeed, but that the trades that do succeed will earn back more than was lost on the trades that did not succeed. Trading strategies require that traders accept no more than an 8 percent loss below the purchase price of a security. No monies above 5 percent of the total portfolio should be risked on any one stock. If a security rises, a strategy such as selling at a predetermined price, or the lowest low of the last 20 days, or when moving average lines cross are all valid trading strategies. Traders must test their own strategies over multiple time periods, bull and bear markets, and extended trading during neutral or sideways markets.
