Trading Strategies For Beginners
If you have started looking at trading, you are not alone. People, at different stages of their lives, start exploring other means of creating and diversifying their income streams. If you are a beginner at trading, there are a couple of important things that need to be learned before you buy stocks.
Advice that many traders give to newbies is to have one base strategy and to try to stick to it. Once you get comfortable with it, only then you can start changing it little by little until you find the perfect strategy that will be only yours.
First things first – it is essential to have a trading plan. Knowing the market is important, but having a well-thought trading plan is compulsory.
What should you include in your trading plan? The basics that you should keep in mind are, of course, your financial goals, criteria for opening and closing positions, funds management rules, and last, but not least, your risk management techniques. Always document your plan and document your actions accordingly. Another thing that a lot of people don’t realize is important, and it is often missed when creating a trading plan, is time management. If you have a full-time job, decide whether you can commit enough time for trading. If trading is just a hobby, plan accordingly how much capital you want to spend on this hobby.
A common beginner’s mistake with trading is to react to the market with emotions. People don’t realize that if they want to be successful in trading, they will need to put their emotions aside. Many beginners enter the market buying stocks of companies they have sympathies with. For instance, you might like Ford as a company, and you decide to buy their stock without research. Unfortunately for Ford, their stock price has been falling down for the past five years, so if you don’t consult with a specialist before buying, and without having enough knowledge yourself, you can end up with a loss of money.
Traders that have many years of experience behind their back can succeed with overtrading. If you are a beginner, it is recommended to focus on a few stocks so you will have bigger chances to maximize your profits. If you decide to juggle around more than you can handle, it will end up in losses.
There are three main trading strategies that are beginner’s friendly and will be more easily understood by someone who doesn’t have any prior trading knowledge. The three strategies are reversion strategy, the trending strategy, and the breakout strategy.
• REVERSION STRATEGY
The easiest way to explain this strategy in a few words is to say that you buy stocks that are low because you think they will go high, and at the same time you sell stocks that are high because you believe their prices will fall.
Having said that, it is not easy to recognize market patterns that hint which stock will go up and which will go down in price. Through reversion strategy, as a beginner, you will most probably follow what the market is doing, and you will do the same. This might not sound like a great money-making scheme, but most of the time it is a good idea to implement this strategy if you are not sure what to do. Once you get more familiar with the market, and with trading itself, you will be able to tell whether a stock price is about to fall.
• TRENDING STRATEGY
This strategy, explained in a few words, is the opposite of the reversion strategy. You want to buy stocks that are already high in price and at the same time you want to sell stocks that are already low and you believe that the price will be falling further.
The breakout strategy is a little bit more advanced than the previous two, but it is still a beginner-friendly. The reason why this might be more complicated to understand and predict is that you will have to gain more knowledge and insight into the market. For example, let’s say that you are looking to buy a particular stock.
If you are familiar with this stock price pattern, you will see that it has had its ups and downs and usually the price never goes higher than $300. This means that the market is restricting the price to go higher than this. The market then is pushing the price down to $250, for example. If you do have enough insight into the company, if you are following the news, and maybe you have been talking with other people who have more knowledge than you, you will be able to tell when the stock is approaching the breakout point. At this point the market will no longer be able to restrict the price, and the price will break out to higher values.