Six Successful Share Trading Strategies

By Dale Gillham

Read this article and/or listen to the Podcast 571 – Six Keys to Success in the Share Market

One area that I am constantly asked about is how to create a share trading strategy. So, in this article I will give you six tips to get you started in creating a solid foundation for your very own share trading strategies. Now, it is true, we are all different and we want different things, which is why one share trading strategy does not fit all. However, it is the foundation that you build your strategy on that needs to be based on the same principles. Get the foundation right and your strategy will stand the test of time. As you move through your journey with me to get educated, you will see exactly why this is so important.

So here are my Six Share Trading Strategies

Share Trading Strategy 1

Successfully trading the share market is not about how much money you make

You may be surprised by this statement, however, successful investing in the share market is not about how much money you make, rather it is about how much you do not lose. In other words, it is about minimising risk, not maximising profits. The most efficient way to minimise risk is to set a stop loss.

A stop loss is a very important part of in all of your share trading strategies, and is simply a price point where you want to sell to preserve capital if a recently entered trade turns against you, or to protect the profits of a winning trade. Unfortunately, most ‘would be’ traders don’t use stop losses, or are very poor at exiting trades, and as such, are largely unprofitable over time.

Share Trading Strategy 2

‘Timing’ the share market is essential to your trading success

Many investors state that a ‘buy and hold’ strategy is the best way to achieve superior market gains. However, most adopting this approach over the last decade would have seen portfolio values drop by an estimated 50% during the darkest days of the GFC. Making matters worse, in order to return the same value pre-GFC the portfolio has to rise by 100%!

By actively trading you can achieve a far superior return, as shares will generally rise in value for between 12 months to five years before falling away in price for similar periods. Using a ‘buy and hold’ approach will see gains made during bullish periods decimated when the bears take control, which they do on a fairly regular basis.

Adopting a simple capital preservation technique, such as a stop loss, will see your returns compound much faster than simply holding on and hoping for the best.

Share Trading Strategy 3

Only invest in quality blue chip stocks

There is an old saying that ‘you get what you pay for’, and this mantra extends to the share market. One of the key strategies to successful trading and investing is to buy only quality blue chip companies with a history of solid returns. However, I see so many traders who mistakenly believe that ‘penny dreadfuls’ hold the key to gaining significant wealth, yet this is rarely, if ever, the case.

Think of it this way. If you were looking to employ someone, would you do so simply on the proviso that their services were cheap? Of course not!! You would want to know that they have a good track record and are capable of completing the tasks for which you have hired them.

Buying quality stocks is much the same. It is essential that you buy stocks with solid growth/income prospects that are managed by a well-regarded team. Leave the ‘penny dreadfuls’ to the gamblers, uneducated traders and investors.

Share Trading Strategy 4

Don’t over use leverage

There are two emotional vehicles that drive the share market, being fear and greed. Greed dominates the emotional landscape of traders when times are good, and fear kicks in when things are bad. In a rising market, you will see many traders leverage up to the hilt, trading just about anything that moves – a rising market will generally hide their mistakes. However, just as leverage can significantly increase returns, losses are also magnified, particularly in a falling market.

Those new to the market are often enticed by fancy marketing and the potentially high returns that can be gained from trading CFDs, Options, Warrants and Futures, yet most fail to make anything. This is because in bear markets the streets become littered with would-be traders who have lost all of their prior profit, and sometimes more, through overuse of leverage, poor skills and fear.

As a general rule of thumb, if you cannot profitably trade blue chip shares on a consistent basis, do not attempt to trade other instruments.

Share Trading Strategy 5

Don’t over diversify

We have all heard the saying ‘Don’t put all of your eggs in one basket’, and there is good reason for this – simply because if you place all of your money into one investment and the investment goes bad, you stand to lose all of your money. Therefore, it makes sense to spread your money across different asset classes. However, many in the industry promote diversifying within an asset class and this where investment performance can go awry.

For example, we find that most people generally hold way too many stocks in their portfolio. Someone who owns an over-diversified portfolio will tend to find that one third of their stocks are rising, while the other two thirds are either traveling sideways, or worse – down. Most get diversification wrong, so to properly show you why I have explained this, along with other market myths in my book ‘How to Beat the Managed Funds by 20%’.

As we only want to hold onto stocks that are rising, it makes sense to get rid of those that are not performing, and restrict a portfolio to between 5 and 12 stocks. It is much easier to select a small number of rising stocks, the portfolio is much easier to manage, and to top it off you will save money on transaction fees.

Share Trading Strategy 6

Have a solid plan

Did you know that the logical part of your brain is much smaller than the emotional side? In order to make smart decisions about your finances it stands to reason that you need the logical side to dominate, yet the opposite is normally the case once a hint of fear or greed sets in. This is the main reason why we see otherwise intelligent people chase ‘get rich quick’ fantasies, or hang onto stocks that have lost significant value – the realm of emotionally driven financial decisions.

In recent weeks, and during the GFC, we have born witness as to what the onset of fear can do to financial markets the world over. However, there is a way to avoid this, and that is, to have a solid plan in place as to how you will, and importantly, how you will not, invest your wealth, and stick to your plan.

So there you have it six successful share trading strategies. Want more? Follow this link to find out how you can learn to create your own plan to trade the share market.