We talked briefly about the main approaches to trading and long-term investing.
4 Active Trading Strategies
1. Scalping
Scalpers trade on short timeframes – from a few seconds to several minutes. They can execute hundreds of trades every day. The profit from each trade is only a few cents per share. As a result, scalpers trade in large volumes and capture small price fluctuations with bigger positions.
Example:
Position size = 5000 shares
Profit per trade = 3 cents per share
Result: +$150
Advantages:
Strategies with clear rules and a high probability of success. If you execute well – you earn.
Plenty of statistical data for analysis and better market understanding.
Ability to quickly learn effective strategies and start earning.
Applicable in different markets, but you need to find the right tools.
Disadvantages:
– A lot of time spent in front of the computer, stress.
– Profitable inefficiencies stop working, so new ones must constantly be sought.
– Special conditions are required – zero or near-zero commissions.
Let me know if you'd like further clarification or more information!
2. Momentum-trading
Momentum trading primarily occurs at the beginning of the trading day, from 9:30 to 10:00 AM New York time. The trader selects stocks that have strong news, such as a quarterly report, released before the main trading session opens. After this, it is important to predict the direction in which the price may move right after the market opens. Once trading starts, the trader enters a position if they see that the scenario is confirmed and there is indeed a strong directional move beginning. The trade lasts a few seconds or a couple of minutes. The trader captures the big news momentum and then looks for other opportunities for intraday trading.
Advantages:
Potential for quick, large earnings.
Develops a good understanding of the market, news, and supply-demand dynamics in the moment.
Some traders make so much profit at the market open that they may not trade for the rest of the session.
Disadvantages:
– High risks. If the price moves against the position, the situation must be quickly managed manually, without stop losses. There is potential for significant losses.
– On some days, there are few opportunities. If good ideas are missed, you have to wait until the next day.
– A lot of stress.
3. Intraday-trading
This includes both previous styles + longer trend trades during the trading session. The trader can hold a position for several hours. The main rule is that when the market closes, there are no open positions on the platform. New trades are only possible the next day.
Advantages:
A more measured and calm approach.
You can set Stop Loss and Take Profit. Some trades can be “automated” and not require manual monitoring.
No risk of carrying positions “overnight” or “over the weekend.” If the market opens with a dangerous price gap, the trader loses nothing because there are no active positions.
The rule "risk:reward = minimum 1:3" applies.
Disadvantages:
– Trading requires volatility, good news situations, and quality chart patterns. These are not always available, so sometimes the days can be boring and passive.
– To achieve results, professionals need to constantly analyze trades and maintain a trading journal. This takes a lot of time, including extra hours when the market is closed.
4. Swing-trading
Swing traders can hold positions for several days, weeks, or even months. This approach is the most long-term in speculative trading. Sometimes, the trades resemble investments.
Advantages:
Less “stress.” There is time to think, analyze, and manage the position and risks.
Short-term price fluctuations have less impact on the final result. Long-term trends are more important.
Disadvantages:
– More knowledge is required. This is not exactly a drawback, but a Swing trader would benefit from understanding the fundamental side of a business, not just technical analysis skills.
– Sometimes, results take quite a long time to materialize.
5 investment strategies
1. (Buy and Hold)
The investor primarily selects reliable assets – blue-chip stocks or well-constructed ETF funds. Alternatively, ETFs on stock indices, such as the S&P 500, may also be suitable. Once purchased, the portfolio is held for YEARS.
Advantages:
This strategy has proven effective many times. Over the course of decades, holding reliable stocks or indices steadily helps to multiply capital. The S&P 500 index has grown by over 600% from 2009 to 2024. Some individual stocks in the index have grown by thousands of percent and paid dividends.
Fewer trades – saving on broker commissions, stress, and time spent trading.
Disadvantages:
– Sometimes the portfolio needs to be rebalanced, otherwise unrealized profits may be lost.
– If investing only in blue chips or indices, there is a risk of missing out on good growth opportunities from new, promising companies.
2. (Money-cost averaging)
The investor buys stocks in equal amounts each month or quarter. If the price has risen, they buy fewer shares, and if the price has dropped, they buy more. This helps smooth out price fluctuations, and the portfolio grows steadily and gradually.
Advantages:
Suitable for investors with a small capital. A small portion of the monthly salary can be allocated to this strategy.
Less risk of buying stocks at a high price and then watching the price fall on the entire capital.
A steady accumulation of position at average prices over a long period.
One amount can be invested sequentially in the stocks of several companies to build a diversified portfolio.
Disadvantages:
– There is a chance of making less profit compared to a single large investment. But the risk of losses is also lower.
3. (Value Investing)
The investor looks for stocks of "unpopular" companies that the market is currently undervaluing. The company has a fundamentally strong, profitable business, but its stock is priced much lower than its true value. The investor’s task is to identify this intrinsic value and acquire it cheaply.
Advantages:
This approach has been proven over decades. This is exactly how Warren Buffett made billions of dollars, and his teacher Benjamin Graham made millions.
The opportunity to buy a stake in a truly strong and high-quality business.
The psychological pleasure of going against the trend – being against the crowd and ultimately being proven right.
Disadvantages:
– Long waiting for results. Sometimes stocks may continue to decline or simply not grow for years.
– There is a risk of buying cheap stocks and ending up with a truly weak company. Thorough analysis is essential.
– You might miss out on profits. Value companies are generally conservative. Riskier and "hyped" industries tend to offer higher returns.
4. (Growth Investing)
The investor selects the most promising projects, primarily in the technology and biotechnology sectors. Attention is focused on popular companies that are expected to make breakthrough innovations and scale aggressively in the coming years. Stocks can be bought on the secondary market, or the investor can participate in IPOs – the initial public offerings of companies.
Advantages:
There is a theoretical possibility of finding a "new Microsoft" and making significant profits over time from a successful company.
You can stay "in the loop" – understanding current news and trends.
Participating in IPOs allows you to sometimes acquire shares at a good discount compared to future market prices.
Disadvantages:
– Increased risks. Growth companies are often unprofitable. Some of them may never become profitable, and their stocks may drop significantly or even become worthless.
– Speculative mindset. Instead of making quality long-term investments, sometimes you need to act quickly following the "buy low – sell high" approach.
5. The dividend strategy
The investor builds a portfolio of shares from stable, large companies with a long history of paying and increasing dividends. This approach can be complemented by purchasing reliable bonds to receive passive coupon income. The earned profit can be reinvested into the purchase of new securities.
Advantages:
Stable cash flows. A portfolio can be built that will provide income on a monthly basis.
The opportunity to earn additional profits from the growth of stocks.
Disadvantages:
– Taxes (but a reduced rate may apply if the W-8BEN form is completed).
– High dividend yield is not always a good thing. Sometimes it means the company's stock has dropped significantly, and the company is struggling, though it has not yet stopped paying dividends.
– Dividend gaps – after the dividend payout, the stock price often falls. The gap typically closes later. However, if you sell the stock before the gap closes, you could lose value.