4 Tips To Help Upgrade Your Trading Strategy

The trading industry has evolved at a rapid pace over the years. What worked yesterday may not work today, and what works today may not work tomorrow. This is because traders are constantly trying out new ways to capitalize on potential investment opportunities in the financial markets. Trading strategies were once as simple as buying low and selling high. Today, they’re broader than that – traders can look for different entry and exit points, be more selective of stocks that meet their requirements or even use derivatives such as options or futures for heightened exposure to market movements without having to trade the underlying asset itself. Whatever shape and form it takes, these improvements increase profit margins and help traders stay on top of their game amidst intense competition from other experienced individuals within the same field. There are, however, some key points that traders fail to consider when upgrading their trading strategies. Read on as we highlight the most important of these factors.

1. Good Market Research Is Key To Successful Trading

Traders often make the mistake of jumping from one trading strategy to another in pursuit of their next big investment idea or opportunity. Unfortunately, they tend to lose sight of what really matters – the underlying data points that serve as a basis for any trading decision. In reality, good market research is still critical in paving the way towards a successful trading career because it’s what dictates your buying and selling decisions going forward. For example, you won’t know where to buy a stock if you don’t have a clue about its price range or fair value estimate, not to mention how much it is likely worth when taking future growth into consideration. If you’re not careful, you risk overpaying for a stock that has a low probability of going up or underpaying for one that is likely to increase in value.  According to the folks at Benzinga, good market research and being on top of all the trading news is the gateway to trade smarter – it enables you to take advantage of trends in the financial markets, identify potential opportunities that present themselves along the way, and give your trading approach a much-needed sense of direction. There are many tools and subscription packages available to you that can help you assess your market research, but ultimately, it’s up to you to make the final call.

Good market research isn’t just about coming up with accurate price targets or forecasts either. It should also include being mindful of any changes in market conditions – bearish trends, for instance, usually result in lower prices while bullish ones lead to higher stock prices over time. Knowing when these conditions are likely to change can help you adjust your strategy accordingly instead of waiting for it to happen by chance. This makes it critical for traders to take the time to really understand market dynamics and what drives supply and demand at any given point in time. Are there changes taking place within the industry? What are the attitudes of competitors? Are prices being pushed higher due to speculative activities or upcoming events? Understanding these factors will help you define your entry points better from a technical standpoint, allowing you to identify potential winners more efficiently as a result.

2. Trading Plan Is Essential For Successful Trading

A trading plan is different from a trading strategy. While the latter details the process of how you will buy and sell stocks, a trading plan provides more guidance with regard to your overall commitment to your chosen trade. It includes an entry point for buying stocks as well as stop-loss limits for cutting potential losses should things go south quickly. Moreover, it allocates a timeframe for holding or selling that particular stock.

This makes it critical for traders to take the time to really understand market dynamics and what drives supply and demand at any given point in time. Are there changes taking place within the industry? What are the attitudes of competitors? Are prices being pushed higher due to speculative activities or upcoming events? Understanding these factors will help you define your entry points better from a technical standpoint, allowing you to identify potential winners more efficiently as a result.

3. Strategies Customized To Your Own Investment Thesis

It’s important to understand your investment philosophy first before deciding on a trading strategy. If you feel strongly about contrarian investments, then purchasing stocks that appear overvalued and waiting for them to fall will serve as the basis for your investment thesis. Similarly, if you look to play long-term trends in the market, it’s best to buy an asset when momentum is strong and sell it off once prices start tanking. In any case, it’s critical that every trader has his or her own customized set of strategies as this allows them to maximize their potential returns with minimal interest in what other traders are doing at the same time.

4. Gaining And Maintaining Momentum Is Vital

Momentum plays a key role in generating exponential growth over a short period of time. A highly lucrative trading strategy can lose its effectiveness if momentum wanes. As such, it is crucial that traders find a system that drives and maintains high levels of momentum on a consistent basis. For example, stock market strategies like the “pairs trade”, which involves pairing two stocks with contrasting performances and profiting from the resulting price differential between them, lose their edge once one of the stocks starts performing poorly as this will impact both companies in different ways. Some investors prefer to pair an up-trending stock with another company at different stages of increasing or decreasing performance so as to maximize their gains over time.

In addition to understanding what strategies suit your tastes best, it’s also imperative that you have a clear-cut plan for how you’re going to execute each individual trade. Successful traders are those who have developed a set of predetermined criteria for making investment decisions, allowing them to effectively stick to their game plan every step of the way. This minimizes the chances of an emotional decision taking place and prevents you from pulling the trigger at the wrong time – two factors that can prove extremely detrimental in your journey towards consistent returns.

No matter what market conditions prevail in society today, it’s clear that good investment strategies will always play a key role in generating effective results. In this day and age, where information overload has become a norm, it is equally important that investors take steps to protect themselves against potentially harmful trading practices by finding reliable sources of information they can rely on when devising their own personal investment strategies.

About the Author

Michael Dewey has helped many small and medium-scale businesses achieve their goals.  He is also passionate about writing and sharing his knowledge regarding startups and finding good investments.