The three basic types of trading strategy

When it comes to building up your wealth, trading on financial markets can be a viable alternative to the long haul of setting up a business – but this doesn’t mean that it is easy!

 

For one thing, there is so much information for newcomers. There are some good sources of advice online, and you can discuss online trading here. Yet if all of that seems a little overwhelming at first, then it is a good idea to focus on the basics. While there are many different investment methods, there are three basic types of trading.

 

Fundamental analysis

 

Fundamental analysis is a time-honored approach to trading. In essence, it focuses on identifying and acting upon the underling factors that can affect how a stock performs.

 

This approach can be applied to a range of financial instruments, including stocks, ETFs, bonds and commodities. To use this analysis strategy in your trading, you will have to take the time to research in-depth the assets that you are interested in trading.

 

For example, to analyze a particular stock, you will need to study the company’s balance sheet, along with its cash flow and income statement, to gauge its financial health and to be able to predict the performance of the stock. You will also need to develop the ability to infer from market news the likely effect on that stock’s price.

 

Technical analysis

 

The second type of trading strategy is the most typical alternative to fundamental analysis. Traders who take the technical analysis approach take time to learn the necessary skills, and it takes far longer to master than the fundamental analysis method. Technical analysis traders are mainly interested in the real past performance of an asset and in using this to predict its future. To do this, they carefully study a range of charts and draw conclusions from the data.

 

Becoming adept at technical analysis trading means learning how to spot the direction in which a stock is heading based on factors such as volume trades and moving averages. This type of trader looks for trend lines in stock charts and is also familiar with important technical principles such as Fibonacci sequences and Bollinger Bands.

 

Options strategy

 

For newcomers who want to keep their trading risks to a minimum, employing a basic options strategy could be the way to go. With options trading, you try to identify which way an asset will move. If you think that it will rise in value, then you place a call option and a put option in case the stock moves in the wrong way. This potentially limits your profits, but it caps your losses.

 

Of course, an options strategy also requires you to use either fundamental or technical analysis to decide which direction you think the stock will head in.

 

Conclusion

 

It takes time to master the skills needed to be a successful trader, but the three strategies detailed here will give you a good overview of the most popular methods to get started.

 

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