Best strategy for long term trading
What does it take to be a successful investor? This is a very broad question. It includes a certain amount of theoretical knowledge, analytical skills, some personal character traits of the investor, and to some extent even luck. But perhaps the most important component of success is having a workable trading strategy. So what is it? Let's find out.
What is a trading strategy
A trading strategy is a set of rules and all the actions a trader takes to make a profit.
A trading strategy is often individual and is created by the trader himself, based on his knowledge, experience, and intuition. Its actions are based upon both futures market and long term asset management.
Trading on the stock exchange follows certain laws. By studying the trend movement, projecting graphical images with the characteristics of the output figures and time, and continuously using technical analysis, the trader will be able to create a personal, practical trading strategy.
A trading strategy allows you to create clear instructions for making trades. This is very important for newcomers to the stock market. They have learned the basics of technical and fundamental analysis and with this knowledge they try to manipulate assets. And catching the necessary control points can be difficult even for experienced investors. As a result trading becomes chaotic and does not bring the desired result. That is why it is so important to have a clear plan of action in different situations so that an investor knows exactly what to do.
Thus, the trading strategy still allows you to eliminate the emotional component. For example, if the price of a stock starts to fall, an investor may get excited and sell it too early. But it often happens that the price goes in a completely different direction, which the trader did not think about. A trading strategy helps to solve this problem. All actions are prescribed and the investor is calm, and makes decisions with a "cool head".
Before practical application, any trading strategy needs to be rigorously tested. Even the one that seems to be the best strategy long term trading. Testing is usually carried out as follows: an investor selects an asset and applies his strategy to it. After that he uses special programs or manually checks the effectiveness of the developed system taking into account historical data. That is, he looks at what would be the results today if he had applied his strategy, for example, five years ago. In case the results are satisfactory for the investor, the trading strategy can be put into operation.
Types of trading strategies
All equity trading strategies can be roughly divided into short-term and long-term strategies based on the length of time the trade is held open.
Short term ones (including scalping and daytrading) open trades for a period of time ranging from a few seconds to a few weeks. Long term refers to transactions lasting from one month to tens of years.
Short term trading strategies
Short term trading is considered to have much greater profit potential. But precisely because of this, it is also more risky. A trader using a short term trading strategy can make a lot of profit and lose a lot in a single day.
The short term trader is in a constant state of tension while trading. Every minute he has to monitor the market situation and at any moment be ready for any turn of events and corresponding change of trading tactics. Because the constant price movements during the day often do not follow the rules of technical or fundamental analysis. The volatility is quite high and short term trends dominating the market are constantly replacing one another. Therefore, to successfully make short term investments a trader has to be very efficient and stress-resistant. That is why short term trading is not suitable for everyone.
Long term trading strategies
Long term trading has its own specifics and peculiarities. Such style of trading does not require extreme effort and attention in the process of watching the price change. In long term investing the situation is more calm, stable and predictable. Every second changes of stock prices are not taken into consideration and events develop slowly. Watching financial news, a trader carries out daily express analysis of the current market situation. It usually takes from fifteen minutes to one hour. The trader has enough time to estimate opened positions and analyze the market. Before opening a position, he can analyze the situation for several days. Closing of a position will not be a surprise for him/her. Especially, if the process will be carried out using pending orders, set at previously calculated levels.
Trading is done without leverage. Therefore, a larger trading account is required. It is important to remember about the need to set limits on the size of opened positions and the amount of possible losses (triggering of Stop Loss orders).
Besides, there is such a notion as volatility of price movement. If we compare two charts, on one of which every separate candle will show the price movement for one day, and on the other one - for one minute, then on the first one the price movement will be more orderly. The trend movements can be clearly seen here. While the second one will show the complete disobedience to the laws of technical analysis.
Thus, technical market analysis works much more clearly on longer trading periods.
The same is true for fundamental analysis. In the case of a trading long term strategy, the longer the time period in question, the better all the changes can be tracked. These changes can be caused by various micro or macroeconomic factors.
In long term trading, the commissions charged by the broker for executing trades are much lower than in short term investing, as positions are opened and closed infrequently.
However, prolonged position holding requires a trader to invest a huge amount of patience. Long waiting times may not be comfortable for all people. There are some psychotypes for whom daily activity is simply necessary. But the time spent waiting is compensated by the high stability of the results, and hence the large profits.
How to choose the best long term trading strategy for trading in New Zealand
Unfortunately, there is no clear answer to the question: what is the best strategy for long term trading? That's because there is no single method of predicting how any stock will trade in any economic period. That's why traders must learn to assess potential price movements over multiple time horizons. That way, you can develop a trading strategy long term that works for you. Technical and fundamental analysis should help you in this.
Fundamental analysis is more about data and the general condition of a given market or country. It is a good indicator because it takes into account both long term and short term factors. This approach allows you to make more informed decisions with every move you make. Meanwhile, technical analysis is not designed to determine the timing of market movements, but rather to assess price trends. You will assess potential price trends.
One of the most common long term trading strategies is trading against the trend. Because this form of strategy targets trends, it requires you to use technical analysis in both the long and short term.
You must also learn to assess and predict where the underlying assets will go in terms of movement. The main advantage of using technical analysis is that it gives you a better understanding of market psychology. It is equally important that you develop a powerful strategy that works in the context of the market in which you are trading. The best long term trading strategies are based on the use of weekly charts. You should not only look at the long term trend of the assets you are trading, but you should also look at the short term and weekly charts.
The main advantage of using technical analysis in the context of a long term strategy is that it gives you a realistic picture of what will happen in the market. If you are a technical analyst, it is likely that you have noticed cyclical trends. You may have noticed that a particular asset has been rising for a certain period of time before starting to pull back. This indicates that the trend is "up" and that it has many potential ups and downs. However, if you have no such information and rely on your gut for trades, you are likely to end up very disappointed with your trades.
To trade effectively, you will also need to develop the discipline necessary for a successful trader. Without discipline, traders tend to make impulsive trades when they see positive trends. They think the trend will continue to rise and may start trading for no good reason.
Volatility is another aspect that can significantly affect your trades. When you trade on volatility, you have a better chance of making big profits because you can control the market more easily.
How to apply a trading strategy
If you are new to the stock market, you should opt for a simple long term trading strategy.
If you already have a trading strategy of your own, or if you want to test a ready-made strategy on specific assets, you can test it in advance on a demo account at your brokerage firm. What is a demo account? It is similar to a real trading account, but the balance of the demo version is a virtual sum of money, which you can manage at your discretion. You follow your strategy and monitor the result. If you are satisfied with the results, it means the system is working, and you can use it in real trading. If you are not satisfied with the results, you can easily adjust your strategy by choosing a better way.
Opening a demo account is very easy, you just need to complete a basic registration on the broker's website. This process will only take you a few minutes. Then you will be given the choice of either opening a practice demo account or a live trading account. The choice is yours.
Some traders prefer to trade on a live account. They justify it by the fact that the training account does not allow seeing practical results of the trader, because there are no emotions, doubts, fear. But let us not forget that in real trading it is harder to make a mistake and every mistake of a trader leads to a loss. So if you're new to trading, you need to practice on a demo account before you start making real trades. It will give you more experience and save you from unnecessary losses.