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How to Choose the Correct Trading Strategy

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When choosing a trading strategy, it’s important to choose one that fits your personality.  Think about how you purchase items and attempt to match your individual style with a trading strategy. Trading strategies come in many forms and styles. There are two types of stock trading analysis that most traders use to determine the future direction of an asset. Investors often use the fundamental strategy. This is where they determine if new information has changed the value of an asset. Or they use a technical strategy where past price action could dictate future price changes.  Many traders also use a combination of both.

Matching Your Personal Style to Your Trading Strategy

Are you a bargain hunter? Before you purchase products do you spend hours or even days looking for the best value? Do you wait until prices go on sale before you pull the trigger? Or do you wait until you need something and then just pull the trigger? You can equate your personal style to the capital markets.  Markets generally have two environments. Either they trend, or they trade sideways. When markets begin to trend, momentum begins to accelerate like a car accelerates on the highway.  Once you reach cruising speed, your acceleration declines. When you trade the markets, you should determine if you want to wait until you find a great bargain or try to catch a trend as momentum accelerates.  If you are a bargain hunter it might be hard to jump on a trend. An if you want to catch a momentum trade as a trend develops, it’s hard to catch a diving knife when bargains are available.

Technical Trading Strategies

There are several different technical trading strategies that you can employ toward online trading.  Trend following strategies attempt to find periods when the market are trending and likely will continue to move in the direction of the trend.  Markets generally only trend 35% of the time, which means that you might be wrong about the trend when you try to find it. Many traders use a moving average crossover strategy to find a trend.

A moving average crossover strategy looks for scenarios when a shorter term moving average crosses above or below a longer term moving average.  Since markets trend only 35% of the time, it means they trade sideways or consolidate most of the time.  To capture the movements of a market when it is trading sideways, you can use a mean reverting strategy.  Technical strategies that use stochastics or Bollinger bands are adept at capturing the changes in the markets when they are consolidating.

Fundamental Strategies

A fundamental trading strategy is one where you believe that the current available information is not reflected in the price of an asset.  Information could include economic data, monetary policy information or in the case of stocks, earnings information. Many times, when new information becomes available, a security will move to a new range.  Fundamental analysts will then evaluate the new information and determine the value of an asset. In many cases, you can combine both fundamental and technical analysis to determine a trading strategy that fits your personal style.

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