How To Build a Stock Trading Strategy?

Stock trading is a natural step forward for every trader. Nowadays, most young traders begin trading cryptocurrencies before moving towards forex and stock trading. Luckily, you’ve already had the experience of trading other financial instruments. In that case, stocks will come to you rather naturally. To do that, however, you will need a solid trading plan. But how to build a stock trading strategy that works? Here are some tips!

1. Stock Trading Strategy – Where To Start?

Before you consider preparing a stock trading strategy, brushing up on your basics is generally a good practice. That’s why we’ll skim over stock market basics in this entry before discussing strategies. We’ll also include a few example strategies you can use as a base on which you can eventually build your own stock trading strategy.

1.1. Stock Exchange for Beginners: What Is It and How Does It Work

What is a stock exchange? Stock exchanges or markets are physical or digital spaces where people buy and sell securities, such as shares. Before the stock market even existed, people would find ways to exchange goods and make deals in marketplaces, on a city and country level, and then on an international level.

The first international trade market can be traced to the late 1400s or early 1500s when Antwerp (now Belgium) became the center of international trade. The localization is not arbitrary, as Belgium borders Germany, France, and the Netherlands, which, much as they are today, were economically significant.

As technology continued to advance, so did the ability for people to exchange information and make deals. Just compare the speed of sending a physical telegram across the ocean to offer a deal to the speed of clicking ‘buy’ on a stock you wish to invest in.

Today’s stock markets are real-time trading thanks to the internet’s power. With platforms like SimpleFX, you can trade and invest your money faster and more safely. Each stock exchange is closely supervised to reduce risk and fraud.

1.2. Some examples of exchanges you may be familiar with:

The New York Stock Exchange (NYSE), better known as Wall Street, is one of the best-known exchanges. It is the largest stock market in the world, and it houses some of the world’s biggest companies.

Nasdaq is the world’s second-largest stock exchange and the world’s largest electronic market. NYSE primarily comprises companies from the technology or IT industries, like Apple or Microsoft.

Another example is the S&P 500 Index. It is an index of the 500 largest publicly traded companies in the United States. It is one of the most commonly used exchanges for trading shares of companies in the United States. The S&P 500 includes companies from various industries, including technology, healthcare, consumer discretionary, financials, industrials, and more. For more information, read our guide “How To Start Trading Stocks“.

2. Stock Market For Beginners: What Are Securities?

Another concept that has to be covered before moving on to discussing strategy is securities. Securities are financial assets that reflect a specific value. When a given security is listed on the stock exchange, it can be bought, sold, and traded for a certain amount. The most well-known securities are stocks, simply company shares. Owning a stock means the person who holds shares in a company participates in its capital.

In essence, security is basically a legal right of ownership. It signifies an acknowledgment that a person or organization owns a portion of a company’s capital or a portion of the debt of a company or a state. So, for example, if you bought a Tesla stock, you would legally own a part of the company. Financial securities can take many forms. Let’s quickly cover the two most common forms of financial securities: bonds and stocks.

2.1. Bonds

A bond is a financial security that represents debt. This means that it represents the debt of its issuer. When an investor buys a bond, he lends a certain amount of money to the issuer of that bond. The issuer will then have to repay this debt with interest.

2.2. Stocks

A stock is a financial security representing a portion of the company’s capital that issued the stock.

3. How Important are Stocks for Your Trading Portfolio?

Very important. Stocks are essential to any portfolio because of their growth potential and higher returns than other investment products. Compared to cryptocurrencies, they are also far more stable.

Developing a comprehensive financial plan to determine how much to allocate to stocks is crucial. It must reflect our investment horizon and the level of risk we are willing to accept in exchange for the potential benefits that stocks can offer.

Asset classes perform differently, and it’s nearly impossible to predict which asset class will perform best in a given year. However, there is one of the key reasons stocks are considered this important. They have repeatedly proven to yield high and pretty consistent returns compared to alternatives like precious metals or treasury bonds.

4. Preparing Your Own Stock Trading Strategy

When you invest in the stock market, you’ll have to do a little more than buy a stock and wait patiently for it to generate interest. In fact, it’s nothing like a bank savings account. It’s an active process during which, depending on your strategy, you will have to pay a little or a lot of attention to how your stocks behave as time progresses. Unless you’re more of a passive investor, but more on that shortly.

Before investing your hard-earned money in stocks, you must have a strategy adapted to your investor profile and investment objectives. There are plenty of ways of doing this, and there have been thousands of books written about each.

Trading strategies can be categorized by:

how much effort you’re willing to put into trading,

your time scope (short-term and long-term strategies),

whether you’re looking to do all the trading on your own or go tech-savvy and employ trading bots.

4.1. Global, Semi-Automatic, and Automatic Strategies

And so, we can recognize global strategies (portfolio diversification), semi-automatic strategies (use of numerous support tools), or automatic strategies (use of trading bots to automatically place buy or sell orders).

The global strategy consists of defining the amount of capital invested in the financial markets and then distributing it in many compartments to diversify one’s portfolio and better manage risk.

Semi-automatic strategy: when deciding on this strategy, you want to use support tools to manage your portfolio. Software is used to find the best investment opportunities in stocks or other financial products. Think graphs and indicators.

Automatic strategy: Strategy based on the use of trading bots. Signals and indicators are programmed to allow these bots to place orders without you having to lift a finger. Bots are pretty accessible and can be purchased by anyone. You can even get custom-built bots on freelance websites like Fiverr nowadays. That said, if you’re not sure what you’re doing, you will benefit very little from these bots. Many bots are of poor quality and, without the proper setup, can do more harm than good.

4.2. Passive and Active Strategies

When looking to become a long-term stock trader, you’re going to have to consider two types of strategy: the passive strategy and the active strategy

The passive strategy: purchasing a stock market index and regrouping different shares using a tracker. The interest is to make the capital invested grow over several years without worrying about its performance. In this strategy, you can also create a global stock market portfolio by buying several indices with low correlations to manage risk. Buy, hold, and possibly forget for a couple of years.

The active strategy: as the name suggests, it requires you to monitor your stock portfolio actively. It can either be focused on investing following analysts’ suggestions or your own stock trading strategy. In your case, it’s going to be a little of the first and a little of the latter. Some of the most well-known active strategies would be Position Trading, Scalping, Day Trading, or Swing Trading.

5. Building Your Own Stock Trading Strategy

How you approach building your stock trading strategy depends mainly on your overall trading experience. Since you’re reading this article, I’m assuming you’re still moving toward full-time investing and are just getting ready to diversify from forex or trading cryptocurrencies. And in this case, your task is going to be easy.

You’ll have to go through several trading and investing strategies mentioned above (for example, our Forex Trading Strategy for 2023). You will compare and learn as much as possible about them and then adjust them appropriately to fit your exact approach.

Please consider this a process rather than a one-time task. Suppose you are looking to prepare a trading strategy for the first time. In that case, I’d suggest you take your time and try different approaches, preferably using a demo trading account.

5.1. Demo Trading, Backtesting, and the Natural Progression Towards Building a Stock Trading Strategy

The process of developing a trading strategy is simple and should not be made to be as such. If you are a freshly baked trader just trying to figure out where to start, your strategy will not be that great. And that’s why the first step is to review the strategies that have been proven to work and try them using a demo account.

Trading using a demo account is like watching a food ASMR rather than eating it. I admit I have been reluctant to trade using demo accounts in the past as I got no buzz from it, there being nothing at stake. Suppose you’re anything like me and want to avoid having anything to do with demo accounts. In that case, I’d suggest you set the smallest amount of money that will make you excited about trading and trade with it. Don’t trade or invest any money you can’t afford to lose.

The wiser way, of course, is to start with a demo account and slowly test the waters. Test different strategies and see what works best for you. People go through higher education before building a viable trading or investment strategy, so don’t rush and take your time. Eventually, you will grow more comfortable adjusting the strategy to fit you better. From there, you’re only a step away from building your own.

5. Summary

Building a trading strategy is a lengthy and advanced process for which you will have a decent amount of knowledge and experience. The quickest and, in my opinion, the best way to achieve those is through practice. Learn about different strategies, try them, and adjust them, preferably using a demo trading account.

It will save you a lot of stress and money in the long term. You can test trading strategies for the stock market, forex, Nasdaq, cryptocurrencies, and more using SimpleFX’s demo trading account.