Trading and Investing Strategies

Trading and Investing Strategies

There's no single playbook that everyone turns to transform $10 into  $10,000. If everyone used the same strategy, nobody would have much  success. Participants in the markets range from teenagers with six screens  watching things unfold minute-by-minute to elderly investors that bought  a stock ten years ago and don't plan on checking in on it for another ten.  

In this chapter, we'll talk about a wide range of trading and investment  strategies. As with technical and fundamental analysis, many choose to  mix and match their approach for the best results.

But first, we'd better define what we're talking about! A trading strategy is  simply a plan you follow when executing trades. Regardless of your  approach, establishing a plan is crucial – it outlines clear goals and can  prevent you from going off course due to emotion. Typically, you'll want to  decide what you're trading, how you're going to trade it, and the points at  which you'll enter and exit. 

Portfolio Management

Portfolio management concerns itself with the creation and handling of a  collection of investments. The portfolio itself is a grouping of assets – it  could contain anything from Beanie Babies to real estate. If you're  exclusively trading cryptocurrencies, then it will probably be made up of  some combination of Bitcoin and other digital coins and tokens.   

Your first step is to consider your expectations for the portfolio. Are you  looking for a basket of investments that will remain relatively protected  from volatility, or something riskier that might bring higher returns in the  short term?  

Putting some thought into how you want to manage your portfolio is highly  beneficial. Some might prefer a passive strategy – one where you leave  your investments alone after you set them up. Others could take an active approach, where they continuously buy and sell assets to make profits.

 

Risk Management

Managing risk is vital to success in trading. This begins with the  identification of the types of risk you may encounter: 

⬥ Market risk: the potential losses you could experience if the asset loses  value.

⬥Liquidity risk: the potential losses arising from illiquid markets, where  you cannot easily find buyers for your assets. 

⬥Operational risk: the potential losses that stem from operational  failures. These may be due to human error, hardware/software failure, or  intentional fraudulent conduct by employees. 

⬥Systemic risk: the potential losses caused by the failure of players in the  industry you operate in, which impacts all businesses in that sector. As  20  was the case in 2008, the collapse of the Lehman Brothers had a  cascading effect on worldwide financial systems. 

As you can see, risk identification begins with the assets in your portfolio,  but it should take into account both internal and external factors to be  effective. Next, you'll want to assess these risks. How often are you likely  to encounter them? How severe are they?  

By weighing up the risks and figuring out their possible impact on your  portfolio, you can rank them and develop appropriate strategies and  responses.   

Systemic risk, for example, can be mitigated with diversification into  different investments, and market risk can be lessened with the use of  stop-losses. 

Day Trading

Day trading is what you see in pretty  much every movie involving Wall  Street. 

Nowadays, though, fervently  shouting over other traders as you  furiously swap bits of paper on the  trading floor isn't the only way to day trade. 

The day trading strategy involves entering and exiting positions within –  you guessed it! – the same day. As you may know, in legacy markets,  trading takes place inside of a fixed window. Outside of these hours, day  traders are not expected to keep their positions open. 

Cryptocurrency markets, as you probably noticed, are not subject to  opening or closing times. You can trade around the clock every day of the  year. Still, day trading in the context of cryptocurrency tends to refer to a  trading style where the trader enters and exits positions within 24 hours. 

Cryptocurrency markets, as you probably noticed, are not subject to  opening or closing times. You can trade around the clock every day of the  year. Still, day trading in the context of cryptocurrency tends to refer to a  trading style where the trader enters and exits positions within 24 hours. 

This style is obviously a very active trading strategy. It can be highly  profitable, but it carries with it a significant amount of risk. As such, day  trading is generally better suited to experienced traders.