6 Stock Investing Strategies - Which One Fits You?

While I think practically everyone should invest in stocks, a lot of new stock investors (including me) don't realize right away that there are different ways of doing so. And I'm not talking about relying on either fundamental or technical analysis.

There are different strategies you can use. That's why sometimes copying someone else's portfolio doesn't always work out so well, whether or not the advice/recommendation/example/observation was pretty good to begin with.

To help with that, here are 6 different stock investing strategies. It's not a bad idea to know what options are out there.





Swing Trading

For example, if you've ever thought of buying a stock because it went down a lot and must be due for a 'rebound' either today or in a few short days, then you were thinking of Swing Trading.

Although that example might sound relatively simple, it takes a lot of skill in technical analysis to actually make a profit using this style. And you'd have to be well-versed with how prices can move. Because even though it's generally true in stocks that what comes down must come up, there's no way to be sure it won't go down some more.

If you're doing or trying out this style, the most basic advice is probably to wait for the confirmation. Jumping the gun could be dangerous to your wealth:)

Day Trading

This is a sort of an amped-up version of swing trading. Just as the name implies, it's all over in a day.

I can't even imagine how elite your skill needs to be to pull this off consistently... or how steely your nerves need to be... or how deep your pockets need to be...

Position Trading

This is practically the opposite of Day Trading. A position trader, like the swing trader, makes use of charts and technical analysis but is more interested in the long-term price movement. This means you're typically holding your stock for months or even years.

But while this style primarily relies on technical analysis (price movement), it also involves some degree of fundamental analysis. After all, there's little assurance an uptrend will last for years, unless there's enough company earnings to support such a rise.

Trend Following

If you follow any of those previous styles, then you're probably doing some form of trend following.

Trend following is just technical analysis with the intent of going along with the price trend. You're basically going with the flow.

When you see a clear trend - again, with confirmation - you buy and ride along with the trend. How long you do so will probably depend on your profit goals or personal preference to some degree. But most importantly, you exit as soon as the trend is broken. You re-enter again when the trend establishes itself.

Essentially, you are taking what the market gives you. As they say, "the trend is your friend."

Contrarian Investing

This is the polar opposite of trend following. If everyone else is buying, then you sell. And if everyone else is selling, then you buy.

If you're a contrarian, you're essentially saying that with so many people following a trend - either being too pessimistic (selling) or optimistic (buying) - then stocks are mis-priced.

If you noticed, it's a lot like Warren Buffet's often quoted (though usually incompletely) advice:

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful."

But the difference is that contrarians aren't necessarily relying on P/E ratios, book value, a company's intrinsic value, or any other financial metric. Those are probably noted, but market sentiment and the emergence of crowd behavior are of at least equal importance.

Value Investing

While a little similar to contrarian investing, it's actually much different. In value investing, a great deal of care is taken to buy stocks at less than their intrinsic value.

Value investors spend a great deal of time analyzing a company's financial reports (earnings, debt, etc.) and prospects for future growth as well as judging their competitive advantage.

Market sentiment is totally ignored.

Buy and Hold

Although this is usually synonymous with Value Investing, they aren't necessarily one and the same.

If you subscribe to the view that the stock market is volatile but generally beats other investments over the long term, then you could be practicing Buy and Hold, regardless of how you came to choose a particular stock.

Such a practice would most likely depend on you relying on fundamental analysis. But it may not necessarily have been about finding an undervalued company. It could simply be finding a good, growing company to put your money in. Or finding a good company that pays out great dividends and holding it indefinitely.


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4 comments:

  1. This is a very good article and especially helpful to those who might be new to stock investing. I wished you added dollar cost averaging as it might be useful to those who want to be invested for the long term and may not have the time to monitor their investments. Thanks.

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    1. Hi Anonymous,

      You're right, that's a bit of an oversight on my part. I'll update this post and add it.

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  2. I like Buy and Hold more since I believe I am the type of guy who makes learned speculations. Great article Carlos!

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    1. HI Sil!

      I'd like that strategy too. I'm just not sure which one to 'go long' with :D

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