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Four principles to smart trading

by , 07 January 2014

With the onset of a new year, it's a great time to have a look at the investment and trading principles you follow. If you're a short-term trader, your investment principles will be different to those of a long-term investor. With that in mind, read on to discover four short-term trading principles from a technical standpoint…

When it comes to your trading principles, you should review these at least once a year, Chris Rowe in Investment U explains… Or you could do it at the beginning of every quarter.

Trading principles to add to your trading toolkit

Here are four technical trading principles that you could include in your list for 2014…

#1: Relative strength investing could be the cornerstone of your success
If Security A advances by more than Security B, then it's showing positive relative strength. If Security A declines, but by less than Security B, it's still showing positive relative strength.

It's important to understand that you can use relative strength to reduce risk of loss as well as increase upside potential.

Relative strength is about being in the right global market.

It’s about finding the best way to invest in something. Relative strength is about finding the right sectors of the stock market. Some people mistakenly believe a bull market causes all sectors' share prices to advance. They say "a rising tide lifts all boats".

Not true.

The reality is that each sector is like its own little stock market within the broad market.

To attempt to outperform the broad market benchmark on a short-term basis, diversify - but only among the top four or five sectors. The longer your time horizon, the wider your diversification.

#2: Employ the use of options to get the most out of your trades
Securities don't only advance or decline. They can advance at sharply different rates, or remain flat. Options strategies exist that are well-suited to all such scenarios.

#3: Take bullish and bearish positions
There are times when you might be one or the other, and then there are times when you might be both.

#4: At times, the direction of your investment account will have little if any market correlation
Most people believe "up market good, down market bad". But you shouldn’t be too concerned with the direction of any financial market broadly. Instead focus on finding situations with the highest probability of success.

This can be a great feeling if the market you’re familiar with is in decline and you’re one of the few who is profiting from the event or avoiding the decline somehow.

But on the flip side, if your investments are in decline while the market you're familiar with is advancing and most people you know are celebrating, it can be frustrating, to say the least.

If you use hedging strategies, take a long-term view. Without question, the account will go through advancing periods and declining periods. Because hedging isn't a common methodology, don't expect it to share common times of success.

These principles could be among the most important you’ve come across.

So there you have it, four short-term trading principles from a technical standpoint.

Four principles to smart trading
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