10 Awesome Stock Trading Strategies That Work

overvalued stock market

Buying or selling stocks is not an easy task, but it isn’t as complicated as you might think. Like everything else, stock trading also requires a carefully planned strategy. It is believed that to consistently make money in the stock market, you have to make the right decision over 70% of the time. Success rates like that don’t just happen, they need to be backed by well-thought out strategies and decisions and by avoiding common investing mistakes.

You’re constantly looking for methods and strategies to make trading in stocks fruitful. But, before you jump directly into these strategies, you need to identify a trading time frame. This step is important because it lays down the basic groundwork for your trading strategy. However, regardless of the fact that you are a day trader or a swing trader, these 10 awesome stock trading strategies will help you master the art of stock trading.

  1. Understanding How Stocks Move

stock price factors
Source: Marketwatch

Understanding the nature of stocks is the first step in scaling through the stock market. Stock markets like NASDAQ and NYSE can be a notorious place for those who do not understand it well. For those who cannot identify bad stock investments, it can be a place where one loses money. You should start off by researching the different industries and sectors that dominate the market. Get a fair knowledge of how different industries and sectors work. This strategy is easy to follow and doesn't require much technical knowledge. Once this battle is won, move on to understand the terminologies and tendencies of stocks.

  1. Go For Lots Of Cash and Reduced Debt

Always keep yourself open to companies that have a clean debt sheet and a healthy cash flow. Companies with such financial records usually indicate positive sales growth. Always review the charts of companies that have seen downfalls, but have managed to pick themselves up from the rubble. Most tech companies are virtually debt free. For example, as per our Google stock analysis, the company has grown revenue at a CAGR of 21.9% over the last 3 yearsand this is in addition to being debt free.

  1. Buying Stocks That Are Oversold

GRPN Technical chart
Groupon Technical Analysis Charts by Amigobulls

Emotions and human psychology play a very important role in driving a stock market. Just as human emotions are usually fickle, the market overreacts way too often. A stock becomes oversold when the market overreacts to the downside. This is one of the strategies that the famous Warren Buffett himself believes in. As the Oracle of Omaha quotes, one should buy what nobody wants and sell when everybody wants it.

  1. Stock Scalping

Stock scalping is particularly beneficial for active or day traders. This strategy exploits price gaps that are caused by order flows and bid/ask spreads. Essentially, the trader here seeks to make various small profits on small price changes in a single day. Think of it this way - You place anywhere between 10 to a hundred trades in a day, with a view that small moves in a stock price are easier to catch.

  1. Breakouts

stock rally
Source: wallstreetwindow.com
In this technique, you identify a key price level and then buy or sell once the price breaks the set pre-determined level. It works with a moderate understanding of support and resistance. When the market moves strongly towards one direction, applying stock trading strategies like breakouts will help you stay in sync with stock movements.

  1. The Momentum Strategy

This strategy is based on the force and continuing movement of stocks. When you follow this strategy, you do not look for the price to break out or pull back, but continue to move in the direction of prevailing trends. Momentum based strategies are best used when a long term move takes place on the asset that is being traded.

  1. Patience Is A Virtue

buffett investment advice
Source: enrichwise.com

The long-term buy and hold strategy revolves around the general notion that in spite of constant hindrance from market forces, stocks generally give a good rate of return in the long run. This is a passive investment strategy, where you invest in a stock after careful analysis and do not look to sell it in spite of short-term price momentum and other indicators. This strategy is not just popular because it is Warren Buffett’s personal investment mantra, but it also comes with tax benefits.

  1. Buy Low and Sell High

While this might seem like an obvious strategy, it is often usually forgotten while going with the flow of the stock market. There’s no way one can time the market precisely but measuring the risk of stocks is important. Buying and selling at the right price perpetually is a long shot for most traders. However, by adapting this contrarian strategy, you can make remarkable profits. This strategy doesn't work independently though, and comes with a set of considerations like:

  • The company should not be vulnerable to competition
  • The earnings of the company must show an upward trend
  • The company should be operating in a growing industry
  1. Value Investment Strategy

value investing
Source: www.clime.com

Value investing is, in fact, considered a very popular and time-tested method of stock trading. It’s an extremely simple strategy and requires you to find companies that are trading lower than their inherent worth. As a value investor, you need to look for stocks with strong fundamentals that are selling at a bargain price,
and have a low P/E ratio. Here, you’re practically looking to invest in companies that are undervalued by the market. So once the market corrects its valuation, the share price of the company automatically increases.

  1. Growth Investment Strategy

Stock picking strategies like this one looks at the growth prospects of the company and not its valuation. As a growth investor, you seek out stocks of companies that you deem good in terms of growth potential. Technology stocks are typically high-growth in nature. One of the greatest investors Warren Buffett have avoided tech stocks for long as he believes that the tech sector is the last place to look for stability and certainity. However, he does state that, “Growth and value investing are joined at the hip”, stating that even though they are theoretically very different from each other, in reality they go hand in hand.

Another well-known investor Peter Lynch has vividly spoken about a hybrid of these two strategies called ‘Growth At a Reasonable Price’ or GARP. This strategy works on the principles of both value and growth, but at different levels. Post Q4 2013, Facebook was considered a good GARP investment.

Always remember to keep your strategy updated, based on market fluctuations and your own financial situation. Being able to adapt to circumstances that are constantly changing will ensure that your trading strategy evolves with time, and continues to bring you profit.

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