Trading is one of the most useful ways for people to turn a little bit of money into a lot of money over time. By consistently recognizing which asset—or assets—are most likely to increase in value, you can accumulate wealth at a rate much greater than you could with a savings account or even with some retirement funds.
However, while the general objective of trading—making money—may be clear to some people, knowing which trading strategy is right for you can sometimes be quite difficult. As you begin doing your research and exploring some of today’s most popular trading strategies, you will quickly discover that there are many different options currently available.
One of the most common questions that new traders ask is what is the best trading strategy? The question, after all, is incredibly reasonable. But just as you will discover there is no objectively “best” stock for you to by or “best” trade for you to make, you will also realize that the trading strategy that makes the most sense for you will depend on several different factors.
The trading strategy that makes the most sense for one trader will not necessarily be the one that makes the most sense for another. In fact, there are many different variables that will need to be considered. In this article, we will discuss the most important things for you to consider when developing a trading strategy of your own. After carefully contemplating your options and choosing a trading strategy that is compatible with your objectives, you will be one step further along the road to riches.
As you have probably learned by now, anyone who hopes to be significantly rewarded as a trader will need to be willing to take risks. The market encourages risk taking, meaning that if you want to earn more as an active trader than you could as a passive investor, you will inevitably need to endure taking some losses over the course of your trading career.
On average, the S&P 500 has historically yielded about 10 percent per year. This means if you were to invest $10,000 right now (and reinvest the earnings), you will have about $108,000 in 25 years. If this is an acceptable level of growth for you, you may just want to consider investing in an index fund. But if you are hoping to earn more, you will need to take risk. Would you be willing to risk that $10,000 in order to possibly earn $1,000,000? These are the tough questions you need to be willing to answer. In general, the more you hope to earn as a trader, the more you will need to be willing to lose.
Trading is something that, naturally, can be significantly affected by various personal constraints. Usually, the most common constraint is time. While day trading has helped many people get rich, the best day trading strategies are very time intensive. In order to maximize your gains, you will need to be constantly monitoring markets. Because many people do not want to quit their day job in order to trade, they may want to opt for a more intermediate-term trading strategy, such as swing trading.
Another common trading constraint is the cost of trading. Depending on where you live, your capital gains will likely be taxed as they are accumulated (or withdrawn). Many trading platforms, such as TD Ameritrade or eTrade have a small cost attached to each trade you make. Though there are some free trading platforms, such as Robinhood, these platforms are not as extensive. While the costs of executing trades are usually rather small, they can begin to add up quickly. This will directly impact your profit margins and, consequently, impact the trading strategy that makes the most sense for you.
When developing a successful trading strategy, you will need to specifically select the asset classes you hope to trade. As you would probably expect, each asset class has various pros and cons attached to it. A truly diversified trading strategy—which, as a rule of thumb, is something you should be striving to create—will likely involve multiple different types of assets.
Individuals who are risk-averse will likely want to trade foreign currencies (forex), index funds, bonds, and other asset classes that are unlikely to lose a significant portion of their value at once. Those who are more risk-tolerant may want to trade highly volatile stocks, cryptocurrencies, or certain types of options. Within each asset class, there will be a specific range of risks you can potentially take, too.
Once you have determined whether you are a risk-tolerant or risk-averse trader, you will be able to then determine whether value or growth investing makes the most sense for you. Value traders will seek to invest in assets that have a clear, measurable, and already partially realized value. Warren Buffet is probably the most well-known value investor in the industry—Buffet will rarely invest in anything that he “doesn’t understand” or doesn’t have a clear source of value.
Growth investors, on the other hand, will try to identify which specific asset is most likely to increase in value over time. Growth stocks and cryptocurrencies can increase in value by 1,000 percent over the course of the year, though they can also be worth almost nothing in a short amount of time. A good trading strategy may involve distributing some wealth into long-term value stocks while also risking other portions of your wealth in assets that are likely to significantly change (for better or for worse) in value by the end of the trading period.
Lastly, no good trading strategy is complete without a reliable set of technical and fundamental indicators. Indicators will help remove the “guesswork” from the trading process and enable you to make much more objective decisions. Fundamental analysis will involve paying attention to stories (and numbers) in the news and making trades in response. For example, if a company announces earnings that were higher than expected, you may have a brief window of opportunity to open a position before the company’s value increases.
Technical analysis involves the use of making trades with the support of hard numbers. Some comprehensive technical indicators, such as the Ichimoku Cloud, will help you predict whether a given asset is about to experience a major value increase. Others, such as Bollinger Bands, Moving Average Convergence Divergence (MACD), and the Relative Strength Index can also help you develop a reliable trading strategy.
As you can see, the best trading strategy for you will depend on many different things. But, in general, a strategy that is diverse, supported by indicators, and properly hedged against risk is one that is likely worth pursuing. Keeping these things in mind—and with a little bit of practice—you can eventually achieve your long-term objectives as a trader.