Online Stock Trading

There are hundreds of different approaches to trading stocks.  There are always unexpected events and unforeseen developments in the market so it is difficult to test and compare trading strategies.  The market is a different market six months later so a winning strategy this year may be next year's loser. 

However if the term 'trading' is used it generally indicates a shorter time horizon than 'investing'.  Investors in stock almost always plan to hold their stocks longer than one year and will hold them year after year if they think the company is doing well.  Traders are generally looking to take advantage of short-term trends in stocks and are quick to sell if they reach their price target and even quicker to sell if the trade goes against them.

One of the most popular trading strategies in recent years has been momentum trading.  Stocks don't really have momentum in the way a moving truck has momentum.  A truck moving at high speed can't stop on a dime and turn around.  A stock can do this without any problem.  However the idea is that if a stock is in a strong uptrend, there are probably good reasons for it and it's likely to continue in that direction for a while.  So traders start jumping in even before all the news is out.  Most traders will use some type of technical analysis to time their entry and exit points.

Other traders, especially those buying market indexes, adopt the strategy of buying on the dips.  This takes a quite a bit more nerve because there are such things as bear markets, but in general it is a strategy that has worked well in the last ten years.  If you look at any long term chart of the Standard & Poors 500 you can see that buying on the dips often works out pretty well.  However buying the big dip in NASDAQ around June of year 2000 is an example where this approach didn't work at all.  You would still be underwater.

Another approach some traders use is to trade on earnings announcements.  For example a trader could buy a stock that announces earnings that are much higher than expected.  Many services provide earnings estimates for stocks so if actual earnings are higher than the expected number the stock will generally move up.  In most cases the stock moves very quickly so the trader generally has to be waiting for the announcement.  Companies announcing earnings that are less than expected can also be traded.  In this case the trader would sell the stock short.  Quite often however, a stock will move up or down before earnings are actually announced, and usually in the correct direction.  This does seem to indicate that company insiders have an idea of where the numbers will be before they are officially released.

A popular online broker for trading stocks is Ameritrade.