Developing a trading strategy is not easy. In fact a strategy can evolve only after thoroughly studying the parameters like the price of stock, the element of risk involved, the volatility of price movements of that stock, its correlation with the market and the time frame for which the stock is planned to be kept.
A series of other factors also come into play and the final strategy reflects their inclusion. But strategies for trading are devised on the basis of a fundamental and technical analysis both of which include the above mentioned parameters:
Technical analysis- This is undertaken to forecast the price trends in the future on the basis of past data available on prices and the volume of stocks traded at that price. They use charts and graphs to study various market indicators, employ models and also study relationships between price and volume.
Fundamental analysis- This is extremely important to gauge the health of a stock by analyzing the company’s financial statements, management, the market it is sold in and its competitors. Fundamental analysis also focuses on historical data to make forecasts for the future. It includes an economic, industry and company analysis to find the intrinsic value of a share, which is actually the share’s true value though it may differ from the current market value. Thus when the intrinsic value is lower than the market price it is time to sell the share and when it is higher, it is wise to buy the share.
On the basis of these analyses, clients would decide on the strategy they would like to adopt-which will be to:
- Long term strategy to buy and hold
- Short term investing to make quick profits
Short term trading strategies were once adopted only by active traders who tried to earn profits from daily or intraday transactions and never considered keeping stocks for a long period. Investors trying short term investing have the option of scalping, in which shares are bought and sold within a matter of seconds or minutes, day trading when the shares are bought and sold within a day or swing trading which helps to make money by keeping shares for a few days or weeks at the most.
Short term trading strategies are adopted by those who have a definite exit plan in mind and wish to make their money and get out of a particular stock holding. It requires knowledge, analytical skills, and quick thinking to make snap decisions on seeing share price movements in a particular direction.
On the other hand, a long term trading strategy is meant for those who would like to make an investment and forget about it. Not overly ambitious about reaping profits, they earn on two counts, namely, from dividends declared by the company and the price appreciation of the shares. Such investors do not have a definite exit plan in mind and simply buy the shares and forget about them for a few years.