Guide to the Top Stock-Trading Strategies

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Contributor, Benzinga
October 13, 2023

Stock traders profit from slight movements in asset prices. By entering and exiting positions with precise timing, traders can grow their portfolios over time. It may seem like luck to properly time an unpredictable market, but there is also some science to stock trading. Stock traders historical chart signals to guide their efforts. Uncovering these trends can amplify your returns. If you want to become a successful trader, it’s important to know how to select a stock trading strategy and how to use the popular ones.

The Need for a Trading Strategy

The stock market can trigger a trader’s deepest emotions. Each time you refresh your portfolio during market hours, you will see a new value. A single refresh can increase or decrease your net worth by hundreds of dollars. Quick changes to a trader’s portfolio can lead to greed, fear, frustration and other emotions, which can result in poor decisions. A trading strategy keeps your goals in perspective and offers a layer of protection from letting emotions fuel your decisions.

How to Select a Stock Trading Strategy

Many people trade stocks, but there are several categories of stock traders. You may be a day trader, momentum trader or another type of trader. Knowing the different types of traders can guide your trading activity and help you formulate a strategy.

Day Trader

These traders treat this field like a profession. Day traders research new opportunities and validate ideas before the market opens and quickly enter positions. It’s common for day traders to monitor prices throughout the day and not do much else until the market closes. 

Active Trader

Active traders are also very active in the stock market. They capitalize on short-term price fluctuations and can enter and exit a position within minutes. Active traders thrive on large-volume orders. These are short bursts of buy-and-sell orders rather than a long-term buy-and-hold approach.

Beginner, Intermediate or Advanced Trader

It’s important to honestly reflect on your trader expertise before deciding how much money to allocate. A beginner trader may have a few trades under their belt, but these traders don’t know too many technical indicators, if any. Beginner traders usually make fewer trades and build their foundational knowledge.

Intermediate traders know about technical indicators, volume, and a few other details surrounding stock trading. Intermediate traders have been trading for several months to acquire knowledge through experience.

Advanced traders have over a year of experience and know the technical indicators, what to look for in volume and additional details. These traders also read the news frequently and assess how it will affect their positions. Advanced traders have a deeper understanding of macroeconomic factors and how they affect the stock market and specific industries.

Stock-Trading Strategies

Looking for a way to get started with stock trading? Incoming traders or seasoned traders looking to mix things up can consider these strategies.

1. Day Trading 

Day trading is the most time-intensive strategy. Traders spend hours on their computers each day reviewing stocks, checking charts and making quick decisions. You can set limit orders to leave the position with an acceptable gain or before the losses fall below the acceptable maximum.

2. Momentum Trading

You can make money following the herd and knowing when to exit. Momentum traders embrace this philosophy and buy stocks that are rising and short stocks facing downward pressure. While momentum trading can result in quick gains, you can be in for a bumpy ride and losses if momentum changes. Momentum trading candidates typically experience more volatility than other assets.

3. Intraday Trading

Intraday traders are a breed of day traders who take fewer risks than the prior two types of traders. Although these traders are involved with the market each day, most of them do not hold onto positions overnight. They sell their holdings before the closing bell to mitigate volatility. These traders won’t benefit from rising after-hour prices, but they won’t be exposed to negative pricing pressure resulting from unforeseen overnight events.

4. End-of-Day Trading

The stock market usually experiences the most movement within the opening and closing hours. End-of-day traders use this knowledge to their advantage by only trading near the end of the day. These traders spend less time on their screens and only have to study the first and last hour of charts try to gauge how a stock’s price might move. Some traders get started at the final hour and sell just before the close or hold onto their shares until the next day. These traders usually sell early in the morning if they hold onto positions overnight. While end-of-day trading doesn’t capitalize on midday movements, not every trader wants to commit that much time to the craft.

5. Trend Trading

Past results may not guarantee future outcomes, but they offer clues. Trend traders use technical analysis to determine trends based on precedents. Fundamental analysis and breaking news can get in the way of technical analysis, and some trend traders may place too much trust in this approach. Trend trading offers historical insight into how a stock is likely to move, but it does not offer a guarantee.

6. Scalping

Scalpers make a flurry of trades, aiming for a string of small profits rather than waiting patiently for a position to grow. Scalpers will leave a position if it provides them a few cents of profit per share without much delay. Waiting on a stock is too risky from a scalper’s point of view. They can capitalize on other opportunities while other traders wait for their positions to pay off. But scalpers will have a hard time recovering from an unprofitable trade because they only take small profits from their winning trades.

7. Swing Trading

No stock experiences smooth movement. A stock can rise 10% in one month and then fall 7% the following month. These fluctuations can even take place in a single week for some investments. Swing traders recognize stocks go through price swings, and they try to profit from each direction. A swing trader will buy shares when they anticipate the stock will increase and then short shares when a downward trend seems likely. Swing traders hold onto their positions longer, which means less time looking at your portfolio. This dynamic helps a swing trader realize more gains if the trade goes in their favor, but it also means a swing trader sits on a loss longer than a day trader. 

8. Position Trading

Position trading is the least time-intensive trading strategy. These traders hold onto a position for months or even years before considering a trade. These traders use fundamental analysis as their guide because technical analysis is primarily for short-term price movements. Holding onto a stock longer reduces the time you spend in your portfolio, but if you sit on a loss, you have capital sitting on the sidelines that’s not growing.

9. Range Trading

Range traders pay attention to support and resistance lines that can indicate a stock’s short-term direction. These investors buy stocks with sturdy support lines and short stocks that have demonstrated reliable resistance lines. Like scalpers, many ranger traders wait for the trade to become slightly profitable before exiting the position and moving on to another opportunity.

10. Pairs Trading

Some assets correlate with each other. They should move in the same direction and have similar valuations. However, the stock market defies reality, and the more you trade, the more you will notice these pockets of opportunity. Traders who use this strategy will buy an undervalued stock that correlates with stocks with higher valuations. These traders often proceed to short the stock with a higher valuation than its correlated peers.

11. Gap trading

Gap traders look at how a stock’s opening price compares to its previous close. They then use gap ranges to determine whether to enter a long position or short the stock. Gap ranges can last five, 15, 30 or 60 minutes. Most gap traders use one of those four gap ranges. If the stock price is above the closing prices within the gap range, it can indicate a buying opportunity. Many gap traders will short a stock if the price is lower than yesterday’s closing price at the end of the gap range. 

12. News Trading

News trading is a more advanced trading strategy that requires you to stay on top of news and know how to interpret it. How will the Federal Reserve meeting impact prices? What does the market expect? Is an economic report getting released this week that would shed some light on current inflation or unemployment numbers? News traders consider these details and quick trade based on the news. While you can be one of the first people to enter or exit a position upon significant news, this strategy can result in knee-jerk reactions, and the news could already be priced into the stock market.

13. Breakout Trading

Breakout traders look for stocks about to pass support and resistance lines. A stock can break out once it passes one of these lines. A stock that passes a level of support can continue to fall, while stocks can gain momentum if they break past resistance lines. Traders look at volume activity to determine the likelihood of a breakout and start a position as soon as the breakout emerges. Breakout trading often ignores fundamental analysis, and any news item can result in support and resistance lines gaining strength, 

14. Reversal Trading

Reversal traders look at technical charts and volume to assess when a reversal is on the way. A reversal indicates a new trend. A stock facing bearish sentiment for several weeks may finally become bullish and present a short-term buying opportunity. Reversal traders look for these types of phenomena, and they also look for bullish stocks that are about to experience bearish momentum.

Importance of Risk Management

It’s important to manage risk with stock-trading strategies and any other investment preferences. Traders should assess their financial goals and how trading can complement those efforts. It’s good to make money, but knowing what you need to retire and how trading helps can help you keep the risk and reward in perspective. 

Getting into Stock Trading

Stock trading strategies can increase your returns and add more diversification to your portfolio. Spreading your risk across many assets makes you less vulnerable if one of your positions does not go your way. Traders should consider starting with small positions and small amounts of cash to test their knowledge in a lower-risk manner. Once you feel confident through knowledge and experience, you can increase the amount you trade over time. Keeping your retirement goals in mind can help you strike the perfect balance to manage your risk.

Frequently Asked Questions

Q

What is the best strategy for stock trading?

A

The best trading strategy depends on your preference and experience level. Day trading is more time intensive while position trading is a long-term strategy.

Q

What is the most profitable trading strategy?

A

Each trading strategy can yield incredible profits. The profitability potential is less about the type of trade and more about the trader.

About Marc Guberti

Marc Guberti is an investing writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.