Trading the Stock Market is one of the most popular things among the financial world fans.
The novice traders, as usual, are not the ones who know how to trade better and will end up doing what they should not in most cases.
The majority of them will approach the world of trading by using day trading, the most promoted way by the industry.
That is a costly mistake.
There are better ways to trade the stock market, which goes from swing to trend trading and long term investing, all of which are much better than day trading, scalping or short-term systems.
How to trade the Stock Market?
Trading the Stock market is something different from investing in it.
Investing could be by “buy and hold”, whether in stocks with good dividends, growth stocks, cheap stocks, value stocks, sector stocks, etcetera.
The key here is to diversify and maintain the investment many years, as many as possible.
Normally, it is not a good idea to try to buy and sell constantly if we want to invest.
Buy and sell often is what we could call trading the Stock Market.
As I said before, trading the Stock Market can have many different variations, but here the main thing is to avoid day trading and try to use systems with a bigger duration, which can be from one week to many months or even some years.
How to trade the Stock Market trend?
“The trend is your friend” is one the mottoes of the trading community.
This is very important in the Stock Market since the trend is very clear here: the long side.
Either for short-term trading or long term investing the way to go is to be bullish and buy stocks.
One of the best ways to trade this way in the short run is to pick the best performing stocks, like Apple, Google (2000s) and trade the long side.
Contrary to investing for dividends the best stocks for trading the stock market are those that provide the better capital gains, in other words those that rise more and faster.
The stocks with better dividends also grow, but their growth rate is much smaller. They provide better dividends and the possibility of investing them though.
However, we have to remember this: the best way to trade stocks is to buy very hot stocks, the ones that are trading and historical maximum prices very often.
For instance, one case in the 2000s is Baidu although stocks like this we can find by hundreds in all countries and times.
This is the typical case of a stock that is growing a lot and whose dividends were not very good, but with a great performance in capital, growing and surpassing its previous maximum prices of before.
These kinds of stocks also have terrible bear markets, like the case mentioned when Baidu fell 70% in 2009.
However, this is the kind of stock that recovers faster. So fast that by the end of 2009 the stock was already trading near its 2007 maximum price.
One moment we could use to know this stock is very hot is when it breaks a major maximum price of the past, like that of 2009.
When that occurs this kind of stock should be one of our favourites and we should trade it letting the profits run as much as possible.
We should use a stop loss order, but it should be much smaller than the profit we are willing to make.
With this we go back to the concepts of “let your profits run” and “cut your losses”, two sacred axioms in the stock market world.
Let us not forget that we are taking about trading in the Stock Market and that the stop is not something we should use for investing.
Investing has its own rules, different from those of trading.
As I said before, a long term investing portfolio should be made not to sell often and therefore not stop loss should be used.
Different ways to trade the stock market
Regarding the different ways to trade stocks or ETFs, there are many, among which the traders will choose, depending on their personal situations.
All of them can have valid arguments, but the common point is that we should trade the long side of the market.
It is clear that if we try to play the shot side it will not probably be a good idea independently of the fact that some day we could be right in riding a bear market.
Trading the short side of the bear market?
Why do you think it is called the “short side”?
For the simple reason that it is shorter than the long side, at least for the last 200 years. Way shorter by the way.
Therefore, the best thing to do is to forget about trading that side.
As simple as that.
You can be right sometimes, but eventually you will discover that the effort is not worthwhile.
Tactics to buy those stocks could be using retracements in the price like trying to buy close to support levels in the bull market.
Other ways could use several indicators, but all of them have to be using the long side of the market.
Everything here will depend on our choice.
Once you are used and have enough experience the process is easy.
It is true it is not a method that will make you rich but it can give you a good deal of profitability, especially for those who do not have huge amounts of money, in which case investing would be the best option.