|
|
|
|
|
Trader
or Investor? Why Not Both. Page
1 |
| With
today’s roller coaster ride of market volatility,
the buy and hold strategies of days past have slowly
been driven into extinction. As investors have gained
access to technology their trading time frames have
grown shorter and shorter. Now, with the ability to
have direct access to the markets, many investors have
taken on the role of professional trader, competing
against NASDAQ market makers to earn their livings.
What many of these newly proclaimed traders are
missing is the value in the old proverb "work smarter
not harder." A well-rounded trader should be able
to trade in multiple time frames, allowing them to participate in
larger price moves during trending market conditions, eliminating some of the stress and
hard work associated with intraday trading.
A successful trader’s arsenal
should contain separate strategies used for trading in
three specific time frames. These three time frames
can be derived from basic DOW theory and are based on
long-, short-, and intermediate-term market trends.
Three Strategies
- The Long-Term Plan
is an investment-based model to be used during long-term market trends utilizing a combination of both
technical and fundamental analysis for stock
selection. These trades will potentially last for
months and possibly even years.
- The Intermediate-Term Approach
is a swing trading type of strategy in which trades are
based on overall market conditions and stock price
patterns. This approach could be implemented during
both trending market conditions and at times when the
overall market or a specific stock is trading within a
range bouncing between support and resistance levels.
- The Short-Term Strategy
requires traders to focus their efforts on a small
group of stocks, and trades are now based on small,
intraday price fluctuations. Intraday trading is
generally used as a source of income rather than a means
of increasing net worth, since it usually requires individuals to be in front of their computers for the
entire day. This strategy should be treated as a
business and practiced on a daily basis as opposed to
the previous two strategies, which are only practiced
during specific market conditions.
By varying your time frame and
trade expectations, you are now able to participate in
the market on a daily basis without the need to sit in
front of your computer every single day. The
percentage of a trader’s capital being distributed
into the three approaches will vary
depending upon the current market conditions. Shown
below are specific examples of market moves and the
strategy that would be appropriate for the situation.
The long-term trade
(investment). This technique is used mainly as a means
of increasing net worth and at any given time could
justify the allocation of up to70% of a trader’s
overall investment capital. A simplified long-term
strategy would be to invest your money in companies
that have exceptional earnings growth and the stock of
which has held up the best during poor market
conditions and was the first to break to new highs as
the market reversed itself. A perfect example of when
this type of long-term strategy should be applied
would be back in November 1999 when the NASDAQ
broke to new highs. With no overhead resistance in
sight, you had the perfect market conditions for
stocks to make a substantial move higher.
|
|
|
|
|
|
