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Basic Trading Approaches to Make Money from Market

Posted By On 10/17/2009 02:50:00 PM Under

One can make money from stock market provided one is able to follow the basic trading approaches in the market and can stick to the same.

Most commonly followed trading approaches are:

Momentum: momentum methods are based on price behaviour. Within momentum basically two types of approaches have evolved :

Trend following: in which you make a trade in the same direction of a defined price trend.
Mean reversion: because ultimately all trend end and trend start from weakness, mean reversion traders try and buy anti trend. Mean reversion strategies have become very popular with very short duration traders. Some highly liquid instruments like index futures exhibit very high degree of mean reversion during certain periods and are popular with short term trades.

Growth: Growth investors buy stocks of companies with rapidly growing earnings or sales. the key to success in growth investing is being early in identifying a growth stock. Growth in companies tend to trend and that is why growth strategies work. In short holding periods of 3 to 12 months growth investing tends to do well.

Value : Value investors basically look at ratio of price to some value indicator like earnings, book value, cash flow, sales, etc. So value investors look for undervalued securities. Research has now identified factors which drive valuation and have shown over longer holding time frames value strategies do well.

Balance Sheet quality: Lot of academic research is now focused on real earnings and real growth as against managed earnings or managed growth. The complexity in accounting practices have resulted in most companies resorting to having two books of accounts: one for investors and one for tax and legal purpose.

Thus if one is able to dwell on these aspects one will be on the path of becoming a millionaire or a billionare from the market as one has to be just smart enough to spot the correct opportunities and undertake the investment as per an individual risk profile.
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