What are the Different Types of Stock Trading Strategies?
There are many different types of stock trading strategies used by investors trying to maximize the capital they put into the stock market. Many strategies focus on the stocks themselves, using analysis to determine the worth of the stocks in correlation to their market prices. Other strategies are based on how one sector of the market is trending or even on how the market is moving as a whole. Some people also use stock trading strategies that are not based on predicting stock movement but instead focus on spreading out capital among different stocks to minimize risk and get the most out of stocks that are performing well.
The number of stock trading strategies available to investors is practically endless, and choosing one is not an easy task. Investors often formulate their strategies based on their individual needs and what they expect out of the money they invest. It's rarely as simple as the "buy low, sell high" cliche often associated with the stock market. In truth, trading strategies can range from relatively simple formulas to extremely intricate systems.
Some investors base their stock trading strategies on analysis of individual stocks. This method of trading often is used in conjunction with the concept of intrinsic value of stocks, which is the actual value of stocks regardless of what their stock prices may be. If an investor sees a stock whose intrinsic value is much higher than is represented by its stock price, then he would likely buy it. By contrast, it would be wise to sell a stock with an intrinsic value far below its market price.
Other investors take a broader view of the stock market when assessing their stock trading strategies. Some may prefer sector analysis, which is an attempt to glean how one particular sector of the market, such as the technology sector, is performing. The theory behind this is that an entire sector moving upward means that the stocks within it will be valuable. Investors may even cast a broader view and wait for the market as a whole to show positive signs before they buy stocks.
Trying to anticipate how individual stocks will move is a difficult process, so many investors use stock trading strategies that eschew predicting in favor of position sizing. Position sizing refers to how much money is actually spent on each asset. By spreading their positions around, investors can mitigate the risk of one or two bad stock choices causing serious problems. This concept is often used with a strategy known as a stop-loss, in which an investor sets a bottom limit on a single stock, at which point he gets out of the position to prevent it from doing much damage.
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