A Stock Market Trading Strategy That Actually Works

A stock market trading strategy is something you need above all else if you are to make it in financial trading. And what better one to use than the very strategy that’s used by successful financial traders.

But before you think about learning it, you may have to “unlearn” some of the things you’ve been taught about financial trading. This is especially true if you’ve been influenced by the “technical analysis” or “fundamental analysis” schools. Proponents of “fundamentalism” tend to be antagonistic towards the technical analysis school, and vice versa. But I believe this attitude is wrong.

Neither of these systems can claim to be wholly right, and neither is completely wrong. The successful traders take the best from each and distill it into a strategy that works.

Let’s take technical analysis first. The main trouble with it is the sheer number of indicators that you can refer to. You have moving averages, Bollinger bands, MACD, fibonacci, oscillators, volume, stochastics, relative strength index (rsi), and momentum, to name just a few. If you consulted all of them on each trade entry and exit then you’d find it hard to make any trades at all.

Whilst each indicator no doubt has value, as well as avid followers, you’ll find that the most successful traders only use the simple moving average. The settings may vary, but the principle is always to use a long moving average, say 200 days, for example, coupled with a short moving average of, perhaps, around 15 days. This tends to work best with longer term trades (which are easier to forecast correctly, anyway) rather than with short term or day trades.

Successful traders use charts and simple moving average indicators more as checks and balances rather than anything else. Their primary tool is market news and information, and simple observation of what is going on in markets, commodities and currencies.

It does take time for an online stock trader to develop the art of knowing when a particular market has reached its limit, whether on the upside or the downside, but when you see a price that is too high or too low for the market to bear much longer then you should check the graphs.

If you’re spread betting then set your stop loss level comfortably outside the limits of the price range over the last trading cycle, and bear that in mind when setting how much you bet on each point. You should risk no more than around 5 per cent of your betting bank, which, as you can see, should be substantial even for small bets.

If you’re dealing in options, warrants or exchange traded funds, then the same principles apply but you won’t have to worry about stop loss levels.

You’ll see from this that financial trading isn’t about getting rich quick (though successful traders do become rich before too long). It takes time for results, especially in the early days. And you should never trade just for the sake of it or because you feel you ought to. Watch the market patiently, and be prepared to swoop in like a bird of prey once you see an opportunity.

Philip Gegan