Technical trading strategies employ the use of price charts and other stock price data so investors can make money on stock price fluctuations. Many strategies exist, although they often boil down to a few groups. Day trading strategies involve buying and selling a stock in one day. Momentum trading is when an investor purchases a stock and then sells when the momentum shifts away from the stock. Scalping occurs when an investor buys multiple stocks and trades them all for a small profit, increasing their profit on the aggregate.
While fundamental trading looks at the company behind the stock, technical trading strategies involve looking at the data relating to the stock price, volume of trades and other data. Successful technical strategies require copious amounts of information, as this is essential to finding out whether a stock price is going up or down. Technical investors will attempt to make money through selling stocks long or short, with the former hoping for price increases and the latter for price decreases. These traders will also use stop losses, which are marks at which they will automatically sell the stock to avoid significant losses.
Day trading is one of the more popular technical trading strategies. Investors simply look at stocks where they believe sufficient gains will occur in a single day. They purchase the stock at a specific price and then sell at some point in the future, quite possibly at the end of the trading day. Stop losses prevent investors from losing money on these risky and volatile trades.
Momentum trading involves looking at the volume of stocks bought and sold during the day. When significant purchases are made that indicate the stock price will rise, the investor will purchase the stock to ride the momentum to higher stock prices. Technical trading strategies based on momentum can also be volatile, like day trading strategies. If momentum shifts from buying to selling, the investor must quickly sell in order to limit losses. Unlike day trading, momentum trading can last a few days or weeks, depending on the momentum and information.
Scalping is a bit more involved than the other types of technical trading strategies. Investors will make dozens or hundreds of trades where they will look to make small gains on each stock. Gains often come from differences in the bid-ask price. When the bid is $10 US Dollars (USD) and the ask price is $11 USD, then the investor hopes to make $1 USD profit by purchasing at $10 USD and quickly selling at $11 USD. This can be highly risky, as the prices will often shift rapidly throughout the day.
