Share trading strategies are numerous in nature. Some investors use long term strategies to purchase undervalued stocks, while other employ short term technical strategies to capture small to medium term trends in share prices. All public companies issue financial results which generally generate volatility post their earnings release. Here are a few strategies that can be used to successfully trade share prices.
Technical Analysis Strategies
One of the best ways to capture profits trading shares is to identify a trend and enter a transaction where you are speculating in the direction of the trend. One of the most common and efficient trend following strategies is a moving average crossover strategy. In this trading strategy you are looking to buy a share when a short term moving average of the share crosses above the longer term moving average of the share price.
For example, you would buy Apple Shares when the 5-day moving average of Apple’s share price crosses above the 20-day moving average of Apple’s share price. Most charting packages calculate the moving average for its users. The 5-day moving average is the average of the past 5-days, on the 6-th day, the first day in the moving average calculating is dropped. You could use the same type of strategy when you are looking for a downtrend. When the 5-day moving average crosses below the 20-day moving average a sell signal is generated.
The longer the moving average, the more likely the significance of the trend. One of the most significant trend signals is the golden cross. This occurs when the 50-day moving average of a share price crosses above the 200-day moving average of the share price. The opposite is called the death cross. This occurs when the 50-day moving average crosses below the 200-day moving average.
Another technical indicator that is very useful is Bollinger band indicator created by John Bollinger. This indicator measures 2-standard deviations above and below a specific moving average. Many use the 20-day moving average as the default. When the share price crosses above the Bollinger band high, the share price has moved too far too fast and will generally mean revert back to the 20-day moving average. When the share price crosses below the Bollinger band low, it will generally snap back as it has fallen too fast.
Trading the earnings release can be volatile and generate spectacular gains as well as significant losses. If you do plan on trading share prices into the earnings, understand that you should limit your bet size to an amount you can afford to lose.
If you want to reduce your risk in trading share prices, you could also consider a market neutral style of trading know as pair trading. Her you would purchase one stock and simultaneously short sell another stock. The goal of pair trading is to bet that one stock outperforms the other stock on a relative value basis. This type of trading removes the market direction from your calculation as it is purely a market neutral trade.
Online share trading can be very exciting and can generate significant income. There are many types of strategies that you can use including, technical, fundamental and market neutral trading.
Financial professional and online entrepreneur, I'm best known as The Financial Blogger. I want to make money because I like enjoying life the way it should be; with a lot of great food and wine! I also love to spend time with my lovely wife and 3 kids!
