Strategy and tactics of trade
Options for trading strategies
An investor who has surplus funds can dispose of them at his discretion, although he does not always do it.
So, a person can do nothing with his cash, taking an extremely passive position. However, inflation after a certain time will largely depreciate this cash. Hence, this is clearly an incorrect strategy of behavior, although as a short-term behavior is acceptable. In this case, the risk is minimal and consists only in the physical destruction of the accumulated wealth, for example, in case of fire, robbery, etc. However, the profit is zero at the same time.
The second option of investing is investing money in government securities. It is believed that the risk of the state refusing to fulfill its obligations is minimal in comparison with the obligations of companies and individuals. At least, it is believed that the state can always simply print money and pay them off on its debts. However, this option does not work when borrowing in foreign currency. Here the probability of default really exists, which Russians could feel in August 1998. At that time, Russia refused to pay the holders of government securities on time. Such an alternative, although recognized as one of the least risky, is not always such.
The third option of investing is to borrow money from some company. It can be issued with a bill of exchange, a bond, a savings or savings certificate or a loan. In this case, the investor receives a higher yield compared to government securities. However, the risk of non-return of such investments, as a rule, is higher.
The fourth option is the purchase of a share in business through the acquisition of shares. In this case, no one guarantees the investor income, but the potential income is not limited. By investing in shares, an investor can receive income from both dividends and the increase in the value of shares. It should be noted that the company does not guarantee an annual payment of dividends, because for some time it may simply be unprofitable.
Finally, the fifth option for investing is speculative operations in the FOREX currency market. Here, the maximum risk is associated with the possibility of losing all invested funds, however, and the potential return may repeatedly exceed the amount of initial investment.
After a brief classification of the most typical investment options, you can go on to consider the problem of choosing the most optimal of them. It should also be understood that in case of portfolio investment, each transaction is fraught with losses (commissions, spreads, etc.), so a very large number of instruments in the portfolio will lead to non-market losses related to the actual investment process.
To select the best investment option for funds, you should first determine:
- Expected return on investment in this financial instrument
• Time horizon (duration of investment of funds)
• The amount of risk that the investor is willing to accept in order to obtain the expected yield
Based on the recommendations of stock analysts, the issuer’s portfolio is selected in the investor’s portfolio, the results of which are expected to yield the highest dividends in the reporting period. Preferred and ordinary shares of these issuers are included in the portfolio until the formation of the register of shareholders for the payment of dividends or the implementation of short-term speculative transactions in order to obtain additional revenue from the increase in the exchange value associated with the dividend policy of the issuing company. In the long term, the investment portfolio should be filled with a sufficient number of liquid shares with a stable exchange value and dividend yield. For long-term investors, the portfolio can be fully formed from such issuers. Large investment and pension funds, insurance companies operate in their activities “long” and “very long” money. Accordingly, most private investors have a significantly shorter investment horizon. Therefore, it is better to give preference to active management strategies.
With active management, periodic changes in the structure of assets are provided, depending on the changing market situation. They can occur at different frequencies: from several times a month to daily changes.
The basis for regrouping the investment portfolio is the forecast for the appearance in the future of favorable or, conversely, unfavorable market conditions. Despite the fact that price changes are difficult to predict, some true short-term forecasts can still be made. Most of the trading models are built on the identification of weak, but regularities, existing in the movements of market prices. The risk is limited by reducing the volume of open positions or closing them completely during unfavorable periods. It is the ability to limit risk and is the main advantage of an active investment strategy.
Analysis of the current market situation
At any time, the investor can independently analyze the mood of the bulk of speculators on the market. The simplest indicator of short-term sentiment can serve as the balance of incoming orders to buy or sell securities. Obviously, the more there are people willing to buy securities, the more likely that the price for these shares will go up in the near future or at least not fall. A similar picture we will see when the market will be dominated by sellers.
The state of uncertainty, or “flat”, corresponds to the lateral movement of the market, that is, the market does not grow and does not fall, but is traded in the corridor with horizontal boundaries.
In which case can there be a “flat”?
- Because of the unwillingness of investors to actively buy and sell shares, that is, there is no interest in the market. This situation is most often found on the days when the Russian stock market is working, and the western markets are closed. Often this may happen some time before the planned appearance on the market of a block of important financial information, according to which there are no unambiguous estimates in the forecasts.
2. In the market there is a speculative struggle to protect the positions occupied by major players. Against every major buyer of securities on the market is the same strong seller of the purpose they have, of course, different. Therefore, if these forces are equal, the “bears” can not break the resistance of the bulls.
The same thing happens with the upward movement of the market, when it rests on the resistance of the “bears” at a certain level. External or internal factors can change this equilibrium, then the market emerges from the side corridor and strengthens its movement towards a breakthrough.
Tactics of players behavior
Obviously, the strategies for conducting transactions by large and small investors differ from each other.
Suppose that a private investor decided to sell his 20,000 shares of RAO UES of Russia. He can do this at any time during the trading session, and his sale will have almost no effect on the level of the market price. Now consider the situation when the stock exchange received a large order to sell, say, 5,000,000 shares of the same issuer. What happens if a trader quickly sells this number of shares at a market price? The current price of RAO “UES of Russia” in a moment may fall by 2-3%.
But a professional trader is more interested in the opposite. He wants to sell this volume not only without losing value, but even sell the entire volume just above the market value.
How to sell shares without loss in price?
- The company’s traders start buying all market orders, thereby increasing the current market price
2. A few large volumes are put up for purchase slightly below the market.
3. Smaller investors, seeing the change in the alignment of forces in favor of buyers on the market, are also included in the buying process of securities
. 4. The market price is even higher
. 5. The traders who are bullying the market up will defend their position by substituting biddies (bids for purchase) and forcing the others to buy from them bought before
6. In this way, the professional trader gradually gives up all of its shares in the company to all those who believe in its further growth.
7. Naturally, after the completion of this short-term call upward, all the previously traded bidders are removed by the trader, since the target is reached
8. Similarly, this scheme works in the game in the opposite direction. the market is being pushed down by increased sales, with the majority of small investors rushing out of stocks urgently, selling them. at the moment when the panic of sales reaches its apogee, a large player opens a purchase and buys shares from the market at discounted prices.
Practical recommendations for the investor
How much is better to start?
A private investor with an entry into the stock market has the opportunity to buy some shares on his “blood”. Naturally, he wants to buy shares of the company, whose quotes have high chances to grow. But the problem is that there are a lot of stocks on the market, and there are simply no such stocks that constantly add to the price. To begin with, our recommendations boil down to fairly simple advice: buy shares of two or three companies from among the “blue chips”. At the same time, you first need to study the market situation and choose the right time to buy.
As for the amount of investment, here everyone must decide for himself. At once we will make a reservation that the initial variant of purchase of shares for 1000 rubles or 500 000 dollars will not be considered. In the first case, the amount is too small to be able to conduct any operations in the stock market. In the second case – too large for a beginner, since managing such large amounts requires a very serious approach and experience in the market.
The main market rule: buy, when everything fell, and sell when it grew.
Start a “feather test” in the stock market better with $ 500.
First, a small amount significantly reduces the risks of the investor at the initial stage of work, and the process of trade will be painless for him.
Secondly, the investor will be able to realize the gained experience and knowledge of market laws by gradually increasing the size of his investment portfolio.
For example, many private individuals gradually increase their assets on the exchange on a monthly basis, transferring to their brokerage account a small part of their salary or other income.
Initial recommendations for filling the investment portfolio
Now as for the portfolio itself. Why do we recommend buying shares of two or three companies, and it is “blue chips”? Here works the rule: do not put all the eggs in one basket. And if scientifically, then we are talking about risk diversification as one of the ways to reduce them. It is desirable that in the portfolio there are shares of companies with different industry affiliation. For example, the oil sector and banks, telecommunications and electricity.
Spreads – the difference between the prices of buying and selling a security.
Equally important for a private investor is the liquidity of the securities that he bought. At operations with малоликвидными securities spreads can reach level of several tens percent. Having bought a share at a price, you can sell it immediately with a big loss. For example, the best purchase price was 25 rubles, and the best selling price is 29 rubles (the spread is 4 rubles). For liquid securities, this difference is calculated in tenths, hundredths or even thousandths of a percent. For example, the best purchase price is 65.67 rubles, the best selling price is 65.69 rubles (spread is 2 kopecks).
The very concept of liquidity already suggests that you can easily buy or sell shares without a significant loss in price. Highly liquid shares for any investment portfolio are a good means of reducing risk. To determine the choice of securities for our portfolio, you need to thoroughly prepare and study both the market and the fundamental performance of companies.
Guided by the golden rule, you should buy shares of the company, which has a high fundamental assessment of its current market value. In this case, it is best to buy it at the time of a short-term drop in quotations on the stock exchange.
How to be a successful trader? Why do not all people trade shares in the stock market?
It is obvious that at all times private investors have won and lost money. In Russia, the number of people and companies that have tried to trade in the stock market is increasing year by year. Some of them continue to earn money with a yield much higher than the yield on bank deposits. However, the number of those who got out of the game in a nonsense manner was also great.
So how to win in a fierce game in the stock market?
Experience and self-control are the two most important components of success. It is important not to let yourself be overwhelmed by emotions and clearly follow the pre-established rules. Do not give up, succumbing to your weaknesses.
Fear and greed – you need to fight them!
Frankly speaking, stock trading is not the easiest business. At first glance, one click “mouse”, and the operation on the market is complete. However, to spend money and buy shares, a great mind is not necessary. The main question that arises after the purchase: what to do with these shares? After all, the investor can not force the share he bought to grow in value. Only an informed trader knows how to make the majority of his transactions with profit. The one who wins, becomes a millionaire, who loses-bankrupt, who came to the market with the illusion of easy money, will become a trader for a little while. According to statistics, someone will lose their money, someone will get into debt and lose someone else’s.
Initially, it is necessary to formulate a certain set of clear trade rules. These rules can be in the head of the trader, be written on paper in simple words with wording, for example: “if the price is so-and-so, and there will be something on the market, then I’ll buy-sell …”
The methodology developed by the investor, based on analytical information on entering the market, should determine the appropriate moments when the probability of transactions with high profit and low risk is high. The method of exit from the market should protect against unnecessary losses of capital in case of unsuccessful entry or reversal of the market, and also effectively fix profits with favorable market movements. Because stock trading is very personal, the best trading rules for one trader may be completely unacceptable for another. For example, some market participants feel insecure, buying on a strong growth or selling after a long fall. They can prefer rules for themselves, which work for a purchase only after a fall, and for sale – only after growth. Some traders will strive for high trading activity,