Trading Strategies

The best trading strategy is an individual choice. It is dependent upon things such as our financial goals, market knowledge, risk profile, available capital, access to information, and personality. It is also worth considering some ....

Basic Tenets .....



Buy and Hold


The Buy and Hold strategy is based on applying Fundamental Analysis to identify and buy stocks currently priced below Fair Value. This is a long term strategy and requires limited maintenance.

This strategy depends upon the stock providing the required return over a long term period.

It does not benefit from market cycles.

Dollar Cost Averaging


This is an extension of the Buy and Hold strategy where a set value investment is made over time.

It does provide some benefit from market cycles as the average cost of stocks held tends to decrease during bear markets (along with your investment).

Stop Loss


A Stop Loss is setting a sell price at some level below the buy price of a stock. This is often considered as an absolute necessity for any stock investment.

This limits potential losses and can also be applied to lock in profits by increasing the Stop Loss sell price as the stock price increases. The setting of the Stop Loss should consider underlying trends.

Diversification


Diversification reduces risk by averaging out returns. The average high is less than the highest high and the average low is higher than the lowest low. Simply holding a number of different stocks reduces the risk from individual stock performance but it still exposes you to the same level of overall market risk. There is also an argument that over diversification has a negative impact by diluting investment focus.

Sector Rotation


Economic cycles result in different market sectors performing better at different stages of the cycle. This suggests that focusing on different market sectors at different stages of the economic and market cycle would improve returns.

In a very basic sense a sector rotational strategy involves portfolio reweighing inline with sectors of highest relative performance.


Economy StageStock Market StageSectors of Highest Relative Performance
BottomRisingFinance
RisingTopConsumer Discretionary, Property
TopFallingMaterials and Resources
FallingBottomHealth, Consumer Stables

Disregarding the economic and market cycles and simply focusing on the sector cycle provides a leading indicator for each sector.

Finance >> Consumer Discretionary, Property >> Materials and Resources >> Health, Consumer Stables >> Finance >> and so it goes .....


When this Sector PeaksMove into this Sector
Materials and ResourcesHealth, Consumer Stables
Health, Consumer StablesFinance
FinanceConsumer Discretionary, Property
Consumer Discretionary, PropertyMaterials and Resources