The Four Fundamental Strategies for Investing and How To Apply Them

With the advent of new communication technologies, trading in stocks has proliferated worldwide, and sped up to such an extent that it seems as though only computer algorithms are able to follow the pace of the market nowadays. With these new technologies, the line between investing and speculation has become blurred, though the two were clearly delineated by John Maynard Keynes as early as the first half of the 20th century.

Nowadays, however, there are at least four distinct types of market actors: investors, speculators, traders, and bogleheads. In this piece, we will be looking at all of these categories in some detail, so the reader can decide which strategy works best for them.


Simply put, investors are the long-term shareholders of the companies they invest in. They base the decision to buy a company’s stock on the overall state of the company’s finances, its efficiency, as well as its future ability to deliver profits to its shareholders.

This technique is based on the economic concept of fundamental analysis, or value analysis. That means that an investor will look at the history of a company’s financial statements, ascertain the management’s abilities, determine whether the company has a good market position, and whether it can stay competitive.

This approach is often seen as conservative and bookish by speculators and traders in particular, since the profits investors stand to make from their investments will not materialize immediately, but will trickle in over a long period of time. This approach prizes stability and order, and one of its most famous proponents, Warren Buffet, is one of the richest people in the world. That should be enough to silence the naysayers.


 As previously mentioned, speculators seek to make profits off the value of a company’s shares, and not off the company’s actual operation or ability to provide returns. Naturally, these metrics are included in the stock price already, but there are often serious distortions in the stock price of a company as opposed to the relatively objective intrinsic value of a share.

Due to the uncertain nature of speculation, this sort of investing is often considered the same as gambling in a casino. Many people, especially regular investors, say that speculation is harmful since it adds nothing of value to the economy, instead seeking to profit while producing nothing. However, Milton Friedman argues that speculators have an advantage in information over other market actors, and that this legitimizes their profits.

This school of thought gave rise to what is referred to as technical analysis, the theory behind all of the graphs, charts, formulas, etc, used by investors to determine whether the price of a particular stock will go up or down, and by how much. This is in contrast to the fundamental analysis we explained earlier.

Generally speaking, it is good investment advice to sell a stock when it starts going down and buy when it starts going up. It is wise to only trade when the market has given clear indications on which way it is going to go. It is not a problem if you sit out a few trades in order to get a clearer sense of the market.


 Trading is quite similar to speculation, with two major differences. Firstly, traders will hold a stock for an even shorter amount of time than a speculator, often for less than a single trading day. That is because traders seek to exploit short term fluctuations in a share’s price, in order to make consistent gains every trading day.

Penny stocks are a particularly fruitful field for such a technique, since their prices can fluctuate wildly during the day. That is because the companies which issue penny stocks are up-and-coming companies, which means their share prices are more volatile, as opposed to the relatively steady stock prices of large companies.

The other difference between speculators and traders is the fact that traders use even more cutting edge technology to make their bets, in fact, they rely on it. They have access to a vast array of metrics and analytic tools, which are often algorithmic, and can take care of trades automatically, when certain conditions are met.

There are now many people whose day job is precisely trading, and they do it from their home computer. The more successful ones offer advice to their peers on private chat rooms, which are a good source of information on this type of investing.


This is a new type of investor, one who eschews all of the above techniques, and simply invests in shares of a diversified index fund. Index funds are a special type of fund that owns stock in almost all of the companies listed on a particular index.

The reasoning behind this is that individual investors can never outperform the market, since they are the market. Trying to consistently get spectacular returns will lead nowhere, since risky bets like this can often go sour.

Index funds have many advantages, since they are passively managed. The fees are small, the portfolio is well-diversified, and the returns are consistent. Even Warren Buffet argues that no investor can beat the market, and that index funds are the safest bet. That adds a lot of weight to the entire concept, so perhaps this is the best place to start for a beginning investor.

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The Most Popular Active Trading Strategies

Unlike long-term trading strategies, active trading relies on short-term movements. Active traders need to quickly buy and sell securities in order to profit from the price changes.

Meanwhile, the long-term strategies require you to have a different kind of mentality. Most investors who use buy-and-hold strategies expect the price changes to have a more significant long-term meaning. In contrast, active traders believe that the only way you could profit is by using those short-term price changes.

There are many active trading strategies used every day on the stock market. Here are the four most popular ones.

Day Trading

Just like the name says, day trading requires you to buy and sell securities during the same day. People often use it as a synonym for active trading, and it is probably the most famous method.

When you are a day trader, you cannot keep your securities overnight – you have to close your position on the same day. In addition, day trading is not for beginners. Usually, there are professional day traders, like market makers and specialists. Still, because technology has advanced in recent years, novices can try to day trade too.

Position Trading

Many people actually think that this method is more of a buy and hold strategy. However, when you are an advanced trader, you can use it for active trading as well.

Position trading refers to determining the current market trend. A position trader will use long-term charts and combine them with other methods. The charts could be daily, weekly, or even monthly. That means that the trade could last anywhere from two days to several weeks. If the trend is exceptionally difficult to discover, it could last longer.

In order to define the trend, position traders are constantly looking for higher and lower highs. They can then use that trend to make a profit from the highest and the lowest market movements. However, that doesn’t mean they are trying to foresee the price levels.

They are usually looking for already successful trends. Furthermore, once the trend crumbles, they will often exit their position. That means that there aren’t many opportunities for them when the market is experiencing high volatility.

Swing Trading

Once a trend falls into pieces, that is when swing traders make an appearance. When it ends, the prices will frequently change to accommodate a new trend. Swing traders can then use that volatility to make a profit.

They usually hold their position overnight, but the trades are still short-term. In addition, these traders often use a set of rules. They use fundamental or technical analysis to determine the rules and identify their next investment. However, their algorithms don’t have to be on point every time – they just have to use them in a one-directional market. Other markets, such as range-bound and sideways, are just too risky for swing traders.


If you want to earn a quick profit, then the scalping strategy might be the right one for you. During bid/ask spreads, and many order flows, price gaps are a frequent occurrence. Therefore, scalpers can use them to get a small profit.

This strategy can be quite risky, so they make sure they hold their positions for a short period of time. Furthermore, they avoid trading high volumes and making large moves. Instead, they focus on small, yet frequent market moves and small volumes.

Because profits per trade are usually small, they often try to find liquid markets which will enable them to earn more. Also, they try to stay away from volatile markets and prefer trading on the quiet ones. Thus, they can avoid abrupt price movements.

Is Active Trading Expensive?

You probably already know that active trading requires you to save up a lot of money. That is because it is vital to cover all your losses if they happen. Furthermore, you have to use a fantastic brokerage house, and make frequent trades.

You can lower the costs by having an in-house brokerage. In addition, such brokerage can also help you have a better execution rate. Thus, you will be making a significant profit while paying a low commission.

Active trading also requires you to buy high-quality software and hardware. That means that an individual trader might not have enough money to support an active trading career.

Final Words

When entering an active trading career, it is vital to think about your options carefully. You have to pick the right strategy, and you also have to make sure you can afford to implement it. Only then can you actually expect it to work for you and help you make a profit.

You also have to bear in mind that you can only pick one strategy. Combining them could lead to confusion, and it could also severely lower your gains.

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Trading Systems: A Guide for Beginners

Achieving success in stock trading is impossible without some kind of a trading system or strategy. Money management and risk management play a role, of course, but without a trading system, you really wouldn’t have anything to do.

So what, exactly, is a trading system? In essence, a trading system is a set of rules that tell you when and how to trade. Today, you can easily find many different black box trading systems. Browse through any trading forum or a reputable trading magazine and you’ll find a section dedicated to trading systems and strategies.

Trading systems range from very simple to extremely complex. They can be based on technical indicators or on a complex analysis of fundamentals. Finding a trading system that works best for you requires some experimentation and experience, but it is absolutely necessary if you want to make profitable trades consistently.

Every trading system can be classified into one of two types. It can be either mechanical or discretionary. We can’t tell you which type is better because they both have distinct advantages.

Mechanical Trading Systems

A mechanical trading system is basically a set of trading rules based on a number of technical and/or fundamental indicators. The chosen indicators trigger buying or selling action when trading conditions are met. These systems are very easy to automate and there is no discretion involved.

Instead of manually monitoring the markets, a trader can simply code the rules into an algorithm. Most automated trading systems are mechanical, although discretionary systems can also be based on complex algorithms.

The simplest mechanical systems use technical indicators, but you can also develop a mechanical system based on fundamentals. For example, you could analyze the past behavior of a stock as well as general expectations and program a mechanical trading system based on the earnings release of this stock. Macroeconomic factors can also be used to develop a mechanical trading system.

These are the main advantages of mechanical trading systems:

  • Mechanical systems are easy to code or program
  • You can easily check the past performance of the trading system
  • Mechanical systems are purely based on logic and leave no room for emotions
  • There is no need for human interference

However, a mechanical trading system is not always a good choice. For example, in uncertain markets, a mechanical system might not function properly. Furthermore, problems may arise if there are coding errors in a mechanical system.

Discretionary Trading systems

Discretionary systems are a bit more complex than mechanical trading systems. In these systems, the decisions are made based on a combination of trading rules and experience. Because experience is involved, the rules can change at every instance in this type of system. This means discretionary systems are more difficult to. Furthermore, these systems require the assistance of a human so the trader needs to be very familiar with the system in order to make profitable trades.

 Using a discretionary trading system is ideal if at least one of these statements is true:

  • You plan to manually analyze chars
  • A large number of fundamental indicators play a role in shaping the outcome
  • You are very familiar with the system you are using

However, beginners often shy away from discretionary trading systems for these reasons:

  • Discretionary systems are difficult to code and require human assistance
  • Creating a successful discretionary system requires years of practice
  • There are no clear rules

The Auto-trading System

Auto-trading systems have become quite popular in day trading. There is a simple reason for this – using an automated system is the easiest way to separate your decisions from your emotions. The signal will be executed regardless of you are feeling and this can be very useful in many situations.

Using an automated trading system is a bit risky, but these systems can also have built-in mechanisms that minimize losses. Many trading platforms offer traders the option of automating their strategies using various programming languages.

When using an auto-trading system, the orders can be sent directly to the market when the conditions are met. However, in most cases, you can also choose to authorize your trades manually before execution. Order authorization does bring a degree of subjectivity into the system, but it also defeats the whole point of using an automated system.

Final Remarks

No matter which type of trading system you are using, it’s always important to have a good understanding of the system and all of the rules it uses. If you want to keep improving your strategy, it’s always a good idea to thoroughly review the system you are using.

You can do this yourself, but there are also various solutions available that can analyze a trading system for you. This can save you a lot of time compared to manually analyzing a system, but the choice is ultimately up to you. In any case, always think about the risk exposure and the maximum drawdown of your chosen system instead of just focusing on the gains.

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Use This Guide To Beat The Market

Everyone wants to make a profit, and after they achieve that, they only want to make it bigger. In this guide, we will talk about nine things that could help you produce the results you are looking for.

Lower Your Turnover and Frictional Expenses

If you have already been in the trading business for some time now, you’ve probably heard about this advice. Turnover can significantly lower your profit, and it is vital always to check whether or not an investment is worth keeping.

Frequent buying and selling moves might actually hurt your business because they involve frictional expenses. Coined by Warren Buffett, they mostly involve the many commissions and spreads you would have to spend your money on.

For example, one investor could spend 25 years investing $10,000 in blue-chip stocks. He would collect dividends and establish different businesses in the meantime. In contrast, another one could spend the same amount of money on frequent trades. He would also have to pay about 3% in frictional expenses every year. In the end, once they both retire, the first investor will have over $5.8 million, while the other one will have only about $2.6 million.

Make The Tax Law Your Friend

Placing certain securities in your 401k or IRA account could save you thousands of dollars every year. However, most people don’t even know that traditional IRA, SEP-IRA and similar accounts allow you to invest your money further.

You can use the profits to make additional investments, and they will all be tax-free until you withdraw them. In addition, if you happen to fall into the top tax brackets, you could make a lot more money simply by buying tax-free municipal stocks.

Observe Other Value Investors

Once you start believing in the value investing philosophy, you will soon see the results. Think about investors like Warren Buffett and Peter Lynch, who have made a fortune by quietly determining where they could find the best returns.

However, this also means that you have to adopt a certain form of analytical thinking. You cannot just invest in McDonald’s because you think they will have a 400% return in 10 years. Instead, you should carefully examine their p/e ratio, cash dividend programs, earnings, etc., before investing.

Avoid Following the Crowd

Just because a certain company is popular right now, it doesn’t mean that it is a worthy investment for you.

This is especially true if the company is selling potentially harmful products, or if their p/e ratio is over forty or fifty percent.

Before investing in such a company, you have to conduct proper research and make sure you know what they are selling. Write a short essay about their products, and why you think they could be a good investment.

Also, these companies are probably making a profit, but their cash flow is extremely low. Thus, there is a high chance they could go bankrupt because they haven’t paid their operating leases, for example.

Market = Stock

It is vital to view your whole portfolio as a single equity, and not as a group of many different stocks. By conforming to such a view, you can easily compare earnings, debt level and growth rates of each of your so-called “stocks.”

Deal With Your Own Finances First

Before spending the money you have earned, set up automated withdrawals to your bank account. That way, you will not be tempted to purchase things you don’t need, and you can accumulate wealth by simply forgetting about the money.

Know When To Give Up and Invest In an Index Fund

Most of you already know that you can experience huge losses because of those frictional expenses. In addition, inevitable life changes can severely set you back on your path to success.

However, instead of giving up completely, you can always invest in a low-cost index fund. These generate fewer losses and fewer turnovers because they only sell the stocks in case of mergers, de-listings, etc. Furthermore, they can substantially lower your total expenses. A regular mutual fund would charge you 1.25%, while a low-cost index fund could cost you only 0.15%.

Bigger Companies Aren’t Always Better

It is always smarter to invest in small companies than giving up your money for a famous one. The reason is quite simple: small businesses can generate solid gains by using a small base capital. Hence, they can grow their earnings at 15% or higher.

However, some more prominent companies have already lowered their prices, thus making themselves more attractive to potential investors.

Know the Potential Risks

Trading comes with a number of potential risks, and it is crucial to differentiate them from market volatility.

Liquidity and bankruptcy risks, as well as the permanent capital impairment, can severely lower your position’s value. Therefore, if you aren’t looking for a quick sell, bear in mind that you should use the low prices just to grow your holdings in a certain company.

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Effective Stock Market Trading Strategies

Coming up with strategies that will improve their trading is one of the most important things for an investor. And, savvy ones will always be on the lookout for various strategies that produce viable results.

Of course, if you buy low and sell high, you will meet a profit. However, there is a lot more to it than diversifying the portfolio and searching for long-term investments. Of course, those are sound ideas, but they almost never produce incredible results. So, if you want to make it big,  you will have to think creatively and learn about the market.So, here are some tips and tricks you should consider.

Avoid the Hype Train

Reading financial reports is a really good way to stay in the loop. However, they tend to be misleading sometimes. So, make sure to rely on your own research and instincts, instead of following what someone else tells you. A lot of huge success stories with startup companies come out of nowhere. And those who chose to invest in them made huge profits. So, if you are serious about investing, it is up to you to trace the next success story. So, keep track of publications, press releases and web pages of various companies. It is not an easy thing to do, but it can really pay off in a big way. Once everyone knows about the rising stock, the price will inflate significantly.

Follow the “Smart Money”

Pro investors who work with over a hundred million dollars in investments, and institutional investors, have to disclose their portfolios to the Securities and Exchange Commission each quarter. While we are not suggesting you straight up copy what they do, these reports can really help you learn about the market. You can see how the biggest institutional investors invest over long and short-term periods.

Dollar-Cost Average Investing

This strategy only works if you truly believe that an investment is worth it long-term. If you are certain that it is a good investment try this approach. Commit to the stock for a period of time, no matter what. Ride out every fluctuation without emotional response or panic selling. Instead, invest a fixed amount of money regularly. And stick to the plan. If the price drops, just buy more stocks (same amount of money) and, if the price goes up, simply buy fewer shares. Make sure that the dollar-cost is affordable to you and test your idea out.

Short Selling

Almost every layman knows that you can profit from a stock that is on the rise. However, you can also make money if you know a stock is going to go down. And you do it by selling the stock that you do not really own. You can borrow a stock and sell it while the value is high. Buy it back once the price drops and return it to the lender. You keep the difference between the two values. However, this can be a risky endeavor, so make sure you are certain the stock will drop and that you will have a buyer for it once the value dips. Just remember to use stop orders since short selling can lead to huge losses if the value of the stock increases.

Call Options

Stock options are a really powerful tool for those who know how to use them. In essence, they work like insurance for your investments. Call options are actually contracts that give you the right to buy certain stock from the seller by a certain date at a predetermined price. This legal contract is binding. Purchasing calls is a good way to make a profit from stocks that you know will increase in value. However, they are next to worthless if the price stagnates or drops. Overall, you can use a call option to minimize the risk when purchasing a stock you expect to rise.

Put Options

Put options are the exact opposite of call options. Instead of providing you with the right to buy certain shares at a price they allow you to sell them. You can use put options as a safety net for shares that might drop. So, if you buy a put option before buying the stock that dips in the value, you can be safe. Even if it falls below the value of the put, you will make your money when selling the stock.

In the end

Remember that it is always up to you to make these calls. Of course, these strategies are very useful, and they almost guarantee a profit. But there is a lot of research you have to do in order to utilize them properly. However, if you know a stock will behave in a certain way, there is more than one way to make a profit from it. And these tips should help you a lot.

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