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Sound trading strategies

Trading strategies can help build your wealth and prepare you for tough times. Some people prefer to buy shares for the short-term, trading on a daily weekly or monthly basis (often to referred to as day trading or active management). Others prefer to buy stocks and hold them for the long-term (sometimes referred to as inactive or passive management).

1. Take heed of history

Over the last couple of years, the world has experienced high market volatility with the global financial crisis bringing with it a shock to everyone’s system. Governments around the world introduced fiscal policies to curb the effect of the downturn. In Australia, the government introduced a number of stimulus initiatives, in order to stimulate spending and protect the economy from the overseas instability. Some of these initiatives worked better than others.

Australia didn’t fall into recession like much of the rest of the world, but this doesn’t mean it couldn’t happen in the future. Technically, a recession consists of two quarters of negative economic growth in gross domestic product (GDP). Australia had one quarter of negative growth in the December quarter of 2008, which was the first in eight years. The stock market also hit a low in March 2009. That’s why it’s important your trading strategy is sound so that you are able to successfully navigate the peaks and troughs.

2. Don’t put all your eggs in one basket

Peter Switzer, founder of Switzer Financial Services, suggests buying shares regularly, say every month or quarter.

Generally, be a long-term investor until you are smart enough and have the time to trade short-term,” he says. “Don't put all of your eggs in one basket and have at least 10 shares for 10 per cent exposure to any one share but maybe 20 shares would be better over time.”

He also says to look at the lessons taught by Warren Buffett. One of Buffet’s famous quotes is, “Be fearful when others are greedy. Be greedy when others are fearful.”

Another strategy for share trading is to buy an exchange traded fund (ETF) which gives you broad exposure and reduces the risks of being exposed to one firm or share, Switzer explains.

3. More products

Of course, being too focused on one market has its downsides, so buying ETFs across a number of markets could be a better strategy.

“These ETFs do help you bring down your costs of investing but you must make sure you don’t pursue cost savings at the expense of good guidance and sensible investment strategy,” says Switzer.

There are also a number other ways you can get exposure to the market and some are riskier than others. These include Contracts for Difference (CFD), where traders trade on fluctuations in share prices without having to own shares. Another example is options trading. These products can be difficult to understand, and risky so it’s important to take professional advice.

4. Do the research

Consider speaking with a trusted financial planner about trading strategies. It’s also important to read as much as you can about share trading. The more knowledge you have, the better. The truth is that no one can predict the future, so the best weapon you have to protect yourself against downturns is to be prepared. This is vital when it comes to trading strategies.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Thursday, August 19, 2010

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