Trading stocks for a living is no easy task. Looking from the outside in, it may look easy – all you have to do is sell the stocks for more than you bought them for.
However, that’s where most stock traders get caught up and lose money. In fact, according to most estimates, around 85 percent of money managers underperform over the years. The difference between them and the group of outperformers can usually be attributed to them having superior stock day trading strategies.
Keep reading this guide to learn the best stock trading strategies to get started in the stock market and how they can help make you money.
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1. Start Small
It’s an exciting moment, your first trade, and it may seem tempting to throw everything you have for a chance to see an incredible return. But keep in mind that a trade can easily and very quickly go south, making it extremely important to work your way in and slowly build a position.
Imagine betting all your money on a stock you’re sure is going to take off at some point in the near future. Then, suddenly, analysts begin applying downgrades to the company, and the stock starts to slip a little. If you had started small, you would now be in a position to lower your cost average and put yourself in a better position to make money on the stock.
2. Chart Support & Resistance Levels
Using charts and applying technical analysis is an excellent way to visualize significant price and volume levels. Using technical analysis, you can determine at what price levels traders are stepping in to buy and at what level they are willing to sell.
Mapping these important levels will allow you to “buy low, and sell high,” giving you a better chance of staying in the green. These levels are referred to as “pivot points” and can give traders signals to buy or sell.
3. Buy Calls & Puts
Another way to trade the stock market involves trading stock options, which are derivatives because their value is determined from an underlying stock. There are two types of stock options to choose from:
- Calls
- And Puts
Traders will buy calls when they believe the underlying stock price will increase and buy puts when they believe the opposite is true. When it comes to options trading, traders have to keep in mind time value and price. This is due to options having an expiration date, and if the price of the underlying stock doesn’t reach the strike price you determined, it can expire worthlessly.
4. Ride the Momentum
An easy stock trading strategy involves chasing stocks that gather momentum and selling before the price eventually peaks and reverses. Momentum trading has blown up this past year, with prices of popular stocks skyrocketing to all-time highs, like Tesla and Zoom.
The challenge with momentum trading is knowing when to enter a trade and when to exit – this can make or break a trader. The best momentum traders will practice good risk management techniques like having a set plan with entry and exit points before entering a trade.
5. Don’t Get Caught Chasing
What happens many times that gets traders into trouble is what is referred to as FOMO, or fear of missing out on a trade. It happens all the time, a stock on your watchlist starts to skyrocket, everyone is talking about it, and you don’t want to miss out.
So, you have two choices – Buy now, or wait until the price reaches your buying level.
6. Do Your Research
Most of your time as a stock trader will be spent researching different equities to find the ones that fit your plan. There are several different types of stock trading strategies out there, but you must find the one that works best for you and fine-tune it until you are successful.
Things to look for when researching stocks include:
- Financial Reports
- Net Income
- Cash Flow
- Revenue
- Earnings
- Competition
- Metrics
- P/E Ratio
- Debt to Equity
- Return on Equity (ROE)
- Return on Investment (ROI)
- Free Cash Flow
- Price History
- Institutional Investors
- Insider Ownership
- Upcoming Catalysts
Sifting through this information might seem overwhelming at first, but the more you do it, the better you will get at finding helpful information that can assist in your trading.
7. Follow the Plan
First, you must create a written plan with a set of rules that you will abide by while trading. Having a set of rules will keep you disciplined while trading, something even professional traders have a hard time with.
Every trader has a different set of rules they follow to keep their emotions in check and allow them to follow the plan they laid out.
8. Grow Dividends
Collecting and reinvesting dividends is the best stock trading strategy for those looking to take a more passive way of making money in the stock market. By reinvesting dividends, you’re creating a compounding effect that Albert Einstein referred to as the “eighth wonder of the world.”
Reinvesting dividends and utilizing compound interest is a proven method of growing wealth in the stock market throughout history.
9. Never Stop Learning
Another challenge of day trading stocks is your days will never look the same, and you will need to be a constant student of the financial markets. The stock market is really good at humbling even the best of traders.
When a trade doesn’t go your way, the best thing you can do is evaluate it and figure out where it went wrong. After determining what you did wrong, write it in your plan to not make the same mistake again.
To Learn More About Stock Trading Strategies
Your success as a day trader will largely depend on how much effort you put into preparation and how you evaluate each trade, taking notes on what worked well and what to avoid. To be a successful day trader, it will take a lot of hard work and determination. Many people have tried and failed before, so be sure to learn from those mistakes.
To learn more about the different stock trading strategies and how they can help you become a successful trader, check out the rest of our blog!