I think the most important thing to remember when trading stocks is not to rely on historial information for your financial analysis. The past does not predict the future. The second is to stick with your strategy. Switching back and forth between trading strategies and basing the decisions on daily market movements can be costly. The market is volatile.
Here are three simple and powerful trading strategies
- Buy and hold
- Average up and down
- Diversify
- Stop loss
Buy and holding for the long term allows your gains amplify because you do not pay tax on the capital gain until its realized (sold). The other benefit is it is difficult to time the market. You never know when the market is at its peak or bottom.
Averaging up and down is amazing strategy, it allows you to capitalize on your gains and losses. I said it before, but you never know when you are at the peak or bottom. Averaging up and down allows you to average your returns. If the market goes down, buy more. If the market goes up, sell some. Averaging down can feel very painful when the market the sliding. This is why diversification is important. You do not want to hold a large percentage of any one stock. Or a large loss in one stock may wipe out your portfolio. Remember a loss is bigger than a gain. To break even from a 50% loss, you will need a 200% gain (0.5*2=1). And a 50% gain and 50% loss is equivalent to 25% loss.
Stop loss orders are useful to limit your losses. It may be the case the stock will rebound, but who knows how long it will take. You can use that capital to reinvest somewhere else. Or maybe it will be a permanent loss, in which case you can cut your losses.
