Top Strategies for New Traders
If you’re brand new to trading and investing in the markets, it’s essential to know a few of the most common techniques used by millions of people at beginner, intermediate, and advanced levels in all markets. Only after familiarizing yourself with a wide variety of strategies and tactics can you select the ones that best suit your individual style and personal preferences. Luckily, there are several approaches that newer trading enthusiasts tend to find most helpful. In addition to moving averages, there are others like position sizing, precise setting of stop-loss points, pure price action, technical indicators, fundamental analysis, and more. Here are details about some of the most popular of the bunch. All can be used as stand-alone methods or combined in a multiplicity of ways.
Simple and exponential moving averages are a feature of nearly every brokerage website. Investors use this basic data to perform a simple analysis of price history. If ABC Corp. shares have a 200-day moving average chart line that begins to fall, traders can gain some specific insights into the short-term potential activity of the stock. For newcomers to the investment world, moving averages are most often examined by comparing a 50-day moving average line against a 200-day one. The general thinking, which is not always correct, is that when the 50-day line rises above or pierces the 200-day line, that’s a bullish indicator. In other words, the prices of security might be about to rise.
Pure Price Action
Pure price action is one of the fundamental styles of market analysis. No matter your experience level, you can employ a pure price action technique and learn much in the process. In the simplest sense, price action trading strategy practitioners study the way prices behave over time. They nearly always examine periods that are less than two years long. What are they looking for? There’s a long list of helpful information you can assemble by doing nothing more than examining a chart. The reputable finance and brokerage websites list all the basic data you need to do a simple analysis with this method. Investors and traders are looking for pure price action-related data like 52-week highs and lows, support and resistance levels, and similar information.
The philosophy behind pure price action is that the pricing of a security in the open market tends to stay within recent ranges. So, if ABC shares have not traded above $50 for the past two years but suddenly break through that level, a pure price action follower might view that move as a major breakout that signals a rise to new highs. There are many ways to interpret the statistics, but using one-year or two-year histories as guidelines can give investors deep insight into the value of a given stock, forex pair, option, or commodity.
Setting the right size of your purchase on a given transaction is not a trading technique, per se, but it is an essential tool that every newcomer should know how to use. The general legalese on most brokerage websites includes warnings for new account holders that they should practice careful position sizing. What does that mean, and how can you do it? It means that there are generally accepted practices, or best practices, for deciding how much capital to risk on each purchase of a security. The rule is that people who want to protect their accounts and preserve their balances should never risk more than 1% or 2% of their account balance on a single trade. The math is easy, and some trading platforms include position sizing calculators for forex, options, stock, and commodities investors. Employing sound money management via a position sizing system of your own can protect you from a series of adverse purchases. Even if you suffer five losses in a row and use the 1% rule, the account drawdown would not exceed 5% of its original holdings.
There’s so much focus on numbers and statistics in the securities markets that it’s easy to overlook fundamental analysis, which centers on non-numerical examinations of company stability and management practices. However, one of the most common fundamental analysis is represented by a number or earnings-per-share. EPA is thought to be one of the more useful pieces of information for making a quick assessment of a company’s long-term health. The metric shows, in a single number, whether a stock is overvalued or undervalued. If earnings are low and the per-share amount is less than the going price of the stock, there’s a chance the security is priced too high. At least that’s the general idea behind the concept of EPA, the amount of profit per share of stock in the marketplace.