Trading and Investment Strategies for Beginners
We’ll be the first to admit that getting started with trading and investing in advanced technologies like AI can be daunting. Common perceptions about this approach to wealth generation are that investing is far riskier than saving and that you need a substantial amount of capital to invest in the first instance.
In reality, you can begin trading or long-term investing with a low starting capital. While it’s true that investing does pose risks, if you go about it in the right way, it can prove to be a more effective method of beating inflation. While there’s no way to guarantee success, you can give yourself a head start by adopting the right approach and strategy from the outset.
Trading vs Investing
‘Trading’ and ‘investing’ are often terms that are used interchangeably, but there are very distinct differences between the two approaches. Furthermore, trading is a short-term financial strategy while investing is focused on the medium to long term.
Given that trading is an active approach, traders typically only hold assets for weeks, days, or even hours. The goal is to profit from price movements occurring over the short term. To add a layer of security to their purchases, traders will likely use a stop-loss order, which will close out losing trades at a specific price level.
In contrast, investing takes a buy-and-hold approach, in which investors will hold onto their assets for upwards of five years – in some cases for decades. In an investment strategy, the goal will be to generate profits from a combination of rising asset prices and dividend profits.
Identifying which approach you are looking to take is the first step to setting out a suitable strategy. If you’re looking for short-term gains, getting into trading might be the ideal option. On the other hand, if you’re saving for your retirement or a medium to long-term goal like a house deposit, you’ll find investing to be a more suitable way to go, as it will allow your assets to ride out any market volatility.
Fundamental Strategy
Knowing what your financial goals are is key to defining an initial strategy. Whether you’ve settled on trading or investing, you can start to think in more detail about what type of assets you’re going to purchase and the best portfolio to build.
It makes sense to invest in what you know and what you feel comfortable with. As a tech enthusiast, your knowledge and expertise can give you an edge in determining the type of stocks to purchase. While investing in individual companies rather than a predetermined portfolio can still be a high-risk strategy, don’t discount the advantage your expertise can bring.
You can add another layer to your strategy by diversifying, as this will allow the capital you invest to reach higher levels of potential. Once you’ve gotten comfortable investing in a niche, broaden your portfolio to include bonds and cash investments, as well as stock assets. The idea behind this is to mitigate the risks that can happen when one asset class is underperforming, ensuring your capital continues to grow or holds steady.
Advanced Strategies
As you become more experienced, whether you’re investing over the long term or choosing to specialize more in trading, you’ll come across several casino-inspired advanced strategies. Since the stock market has long been compared to casino gaming, it makes sense that the strategies high rollers use to secure their big wins are also utilized by traders seeking to generate big profits.
While some casino strategies wouldn’t be applicable to trading and investing, such as the blackjack insurance wager, which typically involves placing a side bet to insure against a dealer’s hand being a blackjack, the likes of the Martingale and Fibonacci are used by traders and investors all over the world. Let’s take a closer look:
The Martingale Strategy was created by French mathematician Paul Pierre Levy. First gaining prominence with European casino goers in the 18th century, it began to be used in the stock market over time. The strategy essentially involves increasing a trade size with every loss – known as doubling down in the casino. It’s considered a risky strategy and should be used with caution, even by experienced traders.
A Fibonacci strategy is based on the Fibonacci sequence, discovered in the 12th century by the monk Leonardo de Pisa (AKA Fibonacci). His sequence of numbers appears in everything from the natural world to visual art, and it’s also been applied to financial investments. Pro traders typically use two types of Fibonacci strategies: the Fibonacci Flush, which identifies support and resistance levels, and the Parabola Pop, which is used to identify early entry points for market breakouts and breakdowns.
