Stock market trading strategies, the investing fast lane trades, sit between income and speculation plays. That large noisy space between income holders and long shot players fills with traders using an endless variety of strategies.
What you learn:
Learn how the thinking of traders differs from investors and speculators and how that affects markets and investing. The lesson makes you aware that trading is an important stock market force and that superior investors know short term daily trading signals can mislead markets and long term investors. Knowing the differences between investing, trading, and speculating helps you better understand market and wealth building. At the end of the lesson, links to related content help you learn more.
FAQs investors asked about stock market trading strategies
These questions and answers about stock market trading strategies have overlapping answers which help investors understand how stock markets, investing, and money-making interrelates.
What is the best trading strategy for beginners?
Beginners should consider investing, not trading. The three basic stock market strategies, investing, trading, and speculating, make money in different ways.
Low-risk and easy-to-learn income investing seeks dividend income and secure returns in all markets. Traders, who seek profits rather than a steady income, buy and sell stocks as prices increase. That works well in rising markets but not when markets move sideways or down, and trading comes with moderate to high risks. Trading takes much more knowledge, skill, and time to use well.
Even higher-risk speculative trading offers spectacular returns, but this most demanding strategy can produce a total loss! It is not for beginners. All three approaches can make money in knowledgeable, experienced hands.
How do you develop a stock trading strategy?
There are endless combinations and variations of the stock market strategies of investing, trading, and speculating.
Long-term, the winners are low-risk dividend investors collecting reliable income streams in all markets.
But in strong rising markets, traders can outperform those income investors and get faster results by accepting moderate to higher risk.
In buoyant or even frothy markets, speculative gamblers can win if willing to accept high-risk capital-burning losses to seek significant short-term gains. Their wins can be spectacular but always at high risk.
By knowing and understanding the variations of these strategies, you can pick the best ones to achieve your investment goals.
What are the different trading strategies?
Successful traders operate on a solid foundation of knowledge and discipline. While anyone willing to learn can become a successful trader, it is an intermediate to advanced skill, not the place for a new investor. Trades can range from microseconds to years. Most basic, 3 stock market strategies all make money in different ways. Lowest risk income investing seeks investments that pay an income, most often as dividends. More aggressive traders are less interested in receiving an income stream but want more profit from riding market price movements. Trading risks can range from moderate to higher risk and in favorable markets can outperform income investing. The highest risk strategy, speculating, are bets on high to spectacular price increases.
What type of stock market trades are most profitable?
Lower-risk, income investing works in all markets to build long-term wealth by investing in growing, stable, dividend-paying companies.
However, traders who buy low and sell high may outperform investors in strong bull markets, although they face higher risks and perform poorly in choppy markets. And not at all in down markets.
And the highest-risk traders, speculators, take on high pre-revenue risks, negative cash-flows, or short sales, which can lead to spectacular profits but also risk total failure.
Overall, investing, trading, and speculating can all produce profits when used correctly, but income investing wins every time over the long term.
How do investing, trading, and speculating differ?
Income investors collect dividends using a low-risk, easy-to-learn strategy and receive dependable, secure, consistent returns in all market conditions.
In contrast, traders seek more significant returns by buying low and selling high. Buying rising stocks to ride higher and sell for profit can work well in favorable markets. But then, traders must do it all over again, and again, and so on. When it works, trading outperforms income investing.
But, with risks running from moderate to high, it performs poorly in challenging markets.
And the highest risk, speculative traders, accept the risks to seek spectacular returns. When it works, the results can be fantastic! However, this extreme risk strategy is the hardest to learn and the most inconsistent producer.
What is the most profitable trading strategy?
Identifying and staying with an established trend is one of the secrets of trading success. Following and trading a well-established trend is profitable, safe, and reliable.
Strong trends can persist for weeks, months, or even longer.
Consistent trading success comes to those researching each market, trend, and target. By aligning with the market trend, astute traders take advantage of what the market gives but never fight or force a trade.
Trading, investing, and fast lane trades
White Top Investor defines trading as buying shares for short term holds of days or months and selling to take profits at higher prices. Before the 21st century, individuals could also day trade buying shares for quick flips after holding them for seconds to a few hours but selling out before the close. However, that went away with the development of high frequency trading that now dominates the very short term trading market.
Trading is the fast lane of stock market plays when compared with the steady cruise that income investors take while steadily building wealth. Traders are often seeking a faster way to build wealth. That same drive motivates the creation of computer trading that developed into high frequency trading. That significant change in stock markets and investing is a complex topic that gets full coverage of this see the White Top Investor course 510, High Frequency Trading Explained.
Defining trading differences
As for defining trading, you will recall we define investing as buying dividend paying stocks for long term holds of years or forever to collect the regular stream of dividend payments. Speculations are trades with higher risks of loss with the possibility of substantial price or value gains for short term holds of days to months.
Trading is a more aggressive market play than investing that chases profit and needs a few pieces in place to do well. For ideal conditions, traders need a rising market, increasing price, growing volume, and order numbers from more buyers. Although traders chase market action for profit, trading is not investing. Investors and traders must know the difference.
Trading is not for beginners. It can be learned and if you are interested, you can learn it. But do so knowing that it is a higher risk strategy with a steep learning curve. Trading can be very profitable for an experienced player. To succeed at trading, you need much knowledge, time and experience.
I am not trying to talk you out of trading. I am trying to make you aware of the challenges and risks it puts your treasure at. Trading has served me well and put considerable money into my pockets. But I paid a steep price to learn the needed skill. If you wish to trade, learn before you do.
Stock market strategies overlap
Although there is overlap between investing, trading and speculating strategies, generally trading defines all action in middle between investing and speculating. That leaves several doors wide open for a vast range of trading strategies.
Trading has been called the investing fast lane because, when compared to income investors content to quietly collect dividends, traders seek more aggressive returns betting on making larger profits from rising prices. Traders can establish stringent criteria or none at all for their trading positions. While some follow a strict formula and other use only the seat of their pants, most operate between those extremes.
FOMO risks plague new traders
When learning stock market trading strategies, FOMO, fear of missing out, can be a challenge for many new traders. Rather than using measured steps to take a position, too often FOMO strikes and they jump in. That is a common misread by those new to trading. Remember, if you miss this bus, there will always be another coming. Avoid the FOMO nightmare because it can bankrupt you.
Charts, patterns and technical analysis
Using number crunching to identify opportunities are well established stock market practices that fall into two broad categories, fundamental and technical analysis. In essence, fundamental analysis uses the company financial as well as economic numbers to identify the quantitative and qualitative values of a stock. Fundamental analysis does not look at the stock market numbers or share price to reach their conclusions.
In contrast, technical analysis looks only at the stock market, share price, and volume numbers to analyze the company to seek a stock trading opportunity. Both forms of analysis are well established but only technical analysis has considerable sophisticated research. Some critics regard technical analysis as nonsense from mathematical minds, others consider it a powerful predictive tool. I find chart reading a useful skill but believe it is nothing more than a form of probability analysis. When trading, having the probabilities line up in your favor can be a good thing.
Costs and risks need considerable attention.
Trading costs and the risk of loss can seriously drain cash from your portfolio. Traders must pay close attention to all costs of trading. Active traders can quickly run up expenses so must be actively managed. Make certain every loss teaches you a lesson. If you do not know why any loss or cost happened you are doomed to repeat your mistake. Make any loss a learning experience and your skill and understanding will quickly grow.
Traders perform best during bull runs when markets rise day after day. During such times, riding higher on the market momentum can deliver exciting, entertaining, and very profitable price gains! But trading happens in all markets, not just during classic bull runs. In fact, the best traders learn how to profit during favorable and challenging of market conditions.
Individual day trading has had it's day
Another generalization that I think is important for new traders to consider is knowing that markets continually change. For example, at one time, day trading was a tremendously profitable way to play stock markets. But that was then and high frequency trading is now. High frequency trading changed markets, investing, and certainly changed day trading.
Before considering day trading, see the White Top Investor course 510, High Frequency Trading Explained. Day trading is an intense job that done well makes money. I know, I successfully did it. But HFT changed that scene. You need knowledge, funds, time and technology to day trade. Most amateur day traders get their heads handed to them. Or at least an empty wallet. When day trading you are competing with professionals that know what they are doing and are very good at it. And you are taking on expertly programed computers that know your every move. No contest!
Types of investing fast lane trades
Stock market trading strategies depend on knowledge, experience and skill more than the other strategies do. Trading works but learning how to do it well takes time and effort. While you can invest on a casual basis, trading requires paying far closer attention to both the market and any stock you trade.
Trading is a strategy of consistent performance that parlays many small gains into a winning performance rather than life changing home runs of speculators or patient long term investor holds. Trading can expose you to two stock market realities, FOMO as well as charts and patterns.
Momentum trading
Momentum trading plays leading stocks from leading sectors for market direction moving on news, rumor, facts or fashion. Momentum traders, in fact all traders, must know a cold hard market truth, trading news will ensure you get hit by some old American values, lying, cheating, corruption and belligerence. Companies and management's lie. Not all of them, not all the time, but often enough to make a difference. This is a game for big people, get used to it and get over it. You must be realistic, that is the reality of the real market environment.
Position trading
Position trading is much more like investing in that it seeks longer term plays to ride for at least days but often months following any established trends that are tracing higher highs and lower lows stock chart pattern. Most position trading is only played to the upside.
Swing trading
Swing trading plays the end of a trend. So when the position traders is exiting, the well played swing trade would already be in position to profit for retreating or reversing prices. To do well this strategy from deep in the heart of technical analysis takes serious amounts of knowledge and skill. Beginners, stay away!
Scalp trading
Scalping is arbitrage, in effect an attempt to buy and sell at virtually the same time. By buying in the low market and selling into the high market, profit gets made on volumes of such trades. However, the arrival of high frequency trading has rendered this obsolete or uncompetitive for individual investors.
Short trading
Investing fast lane trades certainly includes short selling to profit from a declining stock price. Shorting is an advanced trading play but if you are serious about trading, learning to short is an essential skill. Otherwise, you are leaving behind serious amounts of trading profits. The Short Story Shorting Stocks course 505 covers short selling in depth.
Penny trades and junior stock plays
The world of penny stocks (stocks that trade for less than $1.00) and so-called junior or emerging stocks has many trading opportunities. However, risks of loss in these stocks are high. Many such stocks sit with few or no trades or as some wags say, by appointment. That lack of volume keeps high frequency trading away at least until the come alive with some action.
There are many junior markets that include listings for many resource, technology or the newest innovations. Examples include cryptocurrency and cannabis-related stocks as these new business ideas get established as money makers. Before going into these stocks or resources for that matter, be sure to have your homework completed. I have done very well in such markets but have been at this for a long time. It is a market that pays skilled traders very well for knowledge and portfolio management. That takes time to learn.
Trading the investor advantage
Investors that know and understand trading and trader thinking are also better investors. That understanding informs them and helps determine their approach to all markets. Experienced investors know that traders and trading take up most of the stock market space and volume. Traders count for most of the market action, get most of the media attention and produce most of the market noise.
Financial services promote and encourage trading because they make most of their revenue from trading activity. Wise investors know the trading noise and most market media reports are about or because of trading. Those investors know that most of the noise and reports are not relevant to making money as investors.
Traders know the playbook
Experienced knowledgeable investors can read the playbook of the biggest market players and traders. They begin by knowing the strategies used by the big players as the place to begin learning. That knowledge gives them an advantage that can be used as investing in fast lane trades.
But not always to follow the same strategy. Rather, investors learning from the market behavior, grow in knowledge and understanding of stock markets and investing. Investors, speculators and traders all must manage risk, time and their goals to make the right decisions.
Traders keep risk in the middle
The risk approach of traders lies between conservative investors and aggressive speculators. Investors seek low risk, speculators tolerate high risks. Traders seek higher returns, sooner than investors but not at the higher risks speculators accept when seeking faster and greater returns.
Those risk profiles overlap. when considering the broad range of basic stock market approaches. Within each basic strategy there are endless refinements and variations that can provide enhancements.
Traders need movement
At a minimum, a good trade needs both an increasing price for the stock and an increasing volume of shares traded. Simple basic trading plays buy a rising stock that, on most days, continues rising or trending to ever-higher prices.
Those are the typical investing fast lane trades and profitable momentum trades that get sold out at higher prices. Most such plays unfold over a matter of weeks or a few months; very few extend longer than a year.
A momentum strategy can be characterized as buying high to sell higher. This approach sharply contrasts with the buy low sell high mantra of a value investor who always seeks to buy at very favorable, as in low or below value, price to begin with.
In contrast, when markets are rising, the momentum stock market trading strategy buys in with little or no concern about getting a low price to open the trade but does seek:
rising share price
increasing trading volumes
increasing order counts
more investors buying
When price, volume, trades and investor interest all increase we have the making of the best momentum plays. When that happens to many, and not just a few stocks in a market, the collective momentum powers both the market and stocks to ever higher price levels.
Momentum Caution Stock market trading strategies
When actively using stock market trading strategies it is easy to get caught up in the exciting emotions when strong price movements happen in a bull run. Riding such a run can be very profitable but such runs, like any stampede, can quickly turn, become dangerous, and do serious damage!
Alan Greenspan, former Chairman of the U.S. Federal Reserve Bank famously called such times “irrational exuberance”. “Bubble” is another more common description of any market carried away by momentum. Any “we can’t lose” greed-driven market always ends badly. Bubbles always burst and markets do fall.
Momentum plays depend only on stock price movement
Momentum gives no regard to value, income or even if the company has any revenue, let alone profit. Simply seeing a high stock price or one rocketing higher can never be taken as any sign of value. But is can be a great momentum trade if played well. Be careful should this "easy money" tempt you to reach into your pocket. Smart investors must always do their due diligence first.
Yes, first...do your homework before, not after you invest. Remember, when trading momentum, the music will stop and the party ends. When the buyers disappear, someone gets left holding stock and not profit. To profit, you must sell and do so at a higher price to take home any winnings.
To wrap up a trade most profitably, selling at or near the top is important. Obviously, someone has to be buying when you want to sell. That means making a profit requires selling and leaving before the party actually ends.
Traders must sell to win
Exiting the trade before the herd loses interest can get very tricky. Experience and knowledge helps an investor play such trades. However, achieving that level of knowledge and experience takes much time and effort. The price of gaining that experience can be very high.
A new investor must get experienced help before considering using any trading strategy. You can learn to trade. You can learn to play momentum; just don’t be in any hurry to test your skill with any but minor trades. Never confuse luck with skill; luck is great, but not dependable!
Whenever a deal tempts you to jump on without doing homework, think first. There will always be other opportunities to make a profit. In markets, there is no such thing as the last bus. You may have to wait, but there is ALWAYS another bus. Catching the next profitable ride is far easier, less stressful and many times more profitable than making up a loss.
Profits can come quickly
Momentum plays can end in a few weeks but most last 2 to 6 months. There are many exceptions and many false starts. The fast action and large profits are the big appeal. The danger being that our greed overcomes our brains when investing fast lane trades promise us profit.
Some rising stocks that begin as momentum plays can have bull runs that last considerably longer. This occurs when business operations, growth, value and earnings of the company support the higher stock price. Those are rare but exceptionally profitable plays. They can begin as high risk speculations that evolve into momentum trades. Some few mature into spectacular growth companies! For example, Apple anyone!?
Trading bits of market wisdom
Bits of market wisdom include, “it takes all types” and “there have to be buyers and sellers”. These bits of wisdom point out the obvious. We can’t buy if nobody wants to sell and we can’t sell if nobody wants to buy.
When trading, you do not want to be the last one to buy into a trend. If you are, you lose! Like the party game, musical chairs, you don't want to be the one without a chair when the music stops. At the beginning and end of a trend prices reverse. Depending on the direction, when there are no more buyers (or sellers) prices change direction.
Trends can end as quick as a blink. Most often when a strong trend ends, the change happens fast. Most times a fast change also comes with a reversed trend. That is the swing trade opportunity. Alert traders can do well by moving early, but only profit when they are right! Should they get it wrong, losses grow large and fast!
Sellers smarter than the market?
Every market has an endless supply of traders that are smarter than the market. Or at least they think they are. They always remind me of the old real estate story that everybody has heard. The seller who knows more than the market and sets the selling price too high.
For good reason, realtors ignore those sellers. Few buyers consider paying over a fair market price. So unable to find a buyer at the too high price, most realtors pay no attention to such listings which are not a realistic offer to sell. Any realtor can tell you several stories about such so-called sellers.
The solution to their problem is obvious. If they want to sell, price the property at or near the market. Sellers must accept what a prospective buyer will pay or they remain the owner. Realtors, agents or financial advisors are not the problem when a seller has an unrealistic or even stubborn price expectation.
Traders dance on liquidity
To work well, market forces need volumes of shares, buyers and sellers. Trade volumes must be high enough that an individual trade does not cause big price movement. Traders also need to accept the pricing by market forces as fair.
Good traders are pragmatic and realistic. When they are in a losing position, rather than stubbornly hanging on, they take the loss and move on. They free up capital and move on to seek their next profitable trade. They do not sit on a losing position. Clear mistakes fast.
When trading stocks, don’t be an unrealistic seller or an unrealistic buyer. We need to be realistic on both sides of every trade. How do we ensure that happens? Trade only liquid stocks. Those are stocks with enough volume to let you slip in and out without drawing any attention to your order.
Investing in fast lane trades requires a liquid stock, one that trades in reasonable volume. That means before we trade, we need to be aware of both price and volume as essential trading information.
Who and what awaits in the market?
The market lets anybody in. That includes you, me and anyone else interested in being there. It is a public market and that public includes people you may not socialize with, care for or about. But to trade well, you must get to know the cohort that hangs around any market.
That is not saying you need to know them personally, rather you need to observe market behavior enough to understand it. Trading well takes some time to learn and is best understood with a knowledgeable experienced guide.
You need to know that markets do have liars, cheats, corruption and belligerent behavior. You do not need to participate, but you do need to be realistic and aware not everyone plays fair. There are lots of trading charlatans hanging around markets. Greed, fear, panic, slippage and poor decision-making are market regulars. This cohort shows up every single day. Successful traders know how to deal with them.
Regulators look after themselves first
There are many myths and games at play in the market. Markets display very human behavior and activity that brings out the best and worst of human behavior. Don’t make the mistake of thinking you can find ready or dependable help if you feel cheated. There are government and industry regulators, but they are not looking out for you, or after you. Looking after you is entirely up to you.
Government and industry regulators look after themselves first and the market second. Their top concern is keeping the game going. That means keeping as many players as possible in the game and making the markets work. Looking after you is your job.
I am well aware of the laws and regulations. Also, statements made by regulators and industry spokesmen. Don’t count on them. Actions speak louder than words. I repeat, be ready to look after yourself.
Investing is a heads up adult game. Inform yourself, think for yourself, and learn how to play it well and safely to keep it profitable. Trading stocks can make serious amounts of money. Doing it well on a regular basis takes time, knowledge, and experience. It is not a game for beginners.
Do traders think differently than investors or speculators? Answered!
Knowing the thinking of traders differs from investors and speculators affects markets and investing. The lesson also makes you aware of the important market force of trading. Knowing the differences between investing, trading and speculating helps understand markets and wealth building.
Lesson takeaways,
Stock market trading strategies
Stock market trading strategies, the investing fast lane trades, sit between income and speculation plays. That large noisy space between income holders and long-shot players fills with traders using an endless variety of strategies.
- Traders buy to ride price momentum higher
- Investing, trading and speculation strategies overlap
- Traders use technical analysis
- There are many trading strategies
- Momentum trading
- Position trading
- Swing trading
- Scalp trading
- Short trading
- Penny and junior trades
- Traders know the playbook
- Risk management is a core trading skill
- Traders need increasing prices, volumes, orders and buyers
- Winning means selling
Other lessons related to:
Stock market trading strategies
Winston Churchill sees opportunity in crisis
Investing success needs control
Know the trend for market direction
Investing buy high sell low true or false?
Weeding your investment portfolio
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Money Choices Grow Wealth,
lesson links:
Introduction to Money Choices That Grow Wealth Lesson 1
3 Basic stock market strategies Lesson 2
Investing factors time and knowledge Lesson 3
Stock market trading strategies Lesson 4
Speculation risks, returns and failures! Lesson 5
Next lesson 5: Speculation risks, returns and failures!
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