15 March 2023
We have seen considerable developments in online tradingtechnology over the last 20 years. As an online trader, dealing from the comfort of your home, the markets and the investment options available today have never been broader. There are five basic stock trading strategies used by many online traders, often adapted for their particular goals.
History shows that those with a long-term investment horizon generally deliver better returns. This is because the impact of short-term volatility is often less severe when looking to unlock long-term potential. Those comfortable with online trading can also find an array of information and even research notes online. This strategy requires patience, the ability to look past any short-term challenges whileappreciating the long-term ingrained value of a company.
While value investing involves a long-term appreciation of the underlying value of a company, a growth investment strategy has a higher risk/reward ratio. Growth stocks tend to attract online traders because, in the short term, they can be significantly impacted by market sentiment. We have seen this with technology shares in recent years, with long-term potential but massive volatility in the early stages, where many companies are not profitable.
While value and growth investing strategies focus on growth prospects to differing levels, income investing tends to focus on dividends. In addition, while we often associate online trading with online traders looking for short-term profits, many people now manage their portfolios/pension funds online from home. It is often helpful to have a mix of growth and income investments in your pension fund, to maintain an income stream while offering potential for long-term capital appreciation.
Online trading is more associated with a momentum investing strategy, which means jumping aboard the next trend. As an online trader, there are various graphs, relative strength indicators and moving averages which will highlight a change in momentum/rubberstamp a new direction. Online trading is the key to this strategy because it is fast and efficient, and you can also deal on the move via your mobile phone. While not for everybody, it can be lucrative if you have the time, the ability to research trends and an interest in analysing information and data. High risk and potentially high reward!
An index investing strategy is more associated with long-term diversified investment. However, as an online trader, you may look to trade a particularly volatile index such as the NASDAQ. While theoretically, you could have a diversified portfolio of NASDAQ stocks; you can now use NASDAQ trading instruments and funds. This allows you to literally buy and sell the index, exposing you to the broader tech market but not individual tech companies. In challenging times, this type of investment can attract the interest of online traders – it can be very volatile.
As you can see from the characteristics of these five trading strategies, they look at different elements of the market often on different timescales. It is important to pick and even adapt a trading strategy which fits in with your investment goals and your time horizon. One of the more important elements of online trading is the fact that you need to feel comfortable with your decision making process. If this feels forced it is unlikely that you will get the full benefits from each investment strategy, as we have detailed above.
Many people associate online trading with day traders and short-term investors. But, in reality, many people now manage their pension funds with a long-term investment horizon using online trading facilities. That said, the online trading facilities available today are perfect for short-term/day traders who have the time and the patience to sit monitoring markets and making what can be instant decisions.
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