In this time and age, there are several opportunities available for someone who wishes to make money while trading. In order to be successful, one needs to adopt a trading strategy that is dependent on several factors such as time commitment, preferences, risk appetite and basic psychology.
While devising a trading strategy, two of the key considerations that absolutely have to be taken into account are:
1. Active vs. Passive Management
Active trading implies taking advantage of short-term price movements in order to book a profit. It requires a time commitment and active monitoring of the market. The focus is more often on popular instruments like stocks, currencies, options and derivatives.
It can be as aggressive as day trading where the trader buys and sells the securities within the same day or something a little less demanding like position trading where the traders look for successive higher highs or lower lows to determine the market trend and then to benefit from it.
Swing trading is done at the break of a market trend to take advantage of price volatility
The opposite of an active trading strategy is when the trader monitors the price movements over a longer duration of time ignoring the short-term fluctuations in the market expecting to book a profit during the long time horizon. Typically in the stock market, this time period could be anywhere between 3-5 years, which is similar to what you would see with real estate investing.
2. Market Dynamics
To get started, it is important to know the basic definition of what it means to be ‘long’ or be ‘short’ in your trading strategy. In the context of a security, for example in THE case of a stock or a bond, to be long implies that the holder will buy the security and hold on it with the hope of a price rise.
The holder will make a profit only if the price of the security goes up. When security price is down, no profit is made. This is the conventional method of investing.
On the other hand, in the case of a short position, the investor sells the security that he/she does not actually own. Investors selling short are of the opinion that the price of the security is currently high and is expected to go down in the future.
They borrow the security and sell in the open market expecting that in the future they will be cheaper to buy back. If the price drops, they book a profit.
· Long trades are conducted in a rising market while short trades are conducted in a falling market.
· In case of long trades, the losses are limited as in theory, prices cannot drop below 0. However, in short trading, losses can be unlimited, as in theory the price rise of an instrument can be unlimited.
· Long trades can be conducted through all brokers. Not all instruments are available for short trading and not all traders offer the same instruments for short trading.
You need to know trading strategies. It helps you know just all that you need to do, and gives you a complete knowledge of the market to help in easy decision making.
In order to be profitable one needs to understand these concepts and adapt their approach and strategy accordingly. It also implies being flexible enough to know when to be consistent and when to switch. Most of the highly successful traders out there are actually using both long-term and short-term investments in order to make their profits. This brings in more advanced concepts like risk management and requires much more attention. Also, in many situations a larger investment budget is needed. Generally speaking, if investment budgets are low, it is better to go for investment opportunities that have a lower risk. You would make less but you can build up the budget you have for covering potential risks of the short-term opportunities.