Growth stock trading strategies involve choosing the stocks that are most likely to increase in value. While all stock traders hope to increase their wealth over time, growth stock traders are much more risk tolerant and hope to earn strong returns in a shorter period of time.
Depending on your level of risk tolerance, growth stock trading can be incredibly effective. While there will many days—or even weeks—where your available capital ends of decreasing, it is not uncommon for growth stock traders to generate daily returns of five percent or even.
Growth stock trading is as much of an art as it a science. By combining your understanding of markets, the use of technical indicators, and various other factors, you can become a successful growth stock trader. However, it will still be important for you to be careful—without the right systems in place, your portfolio can quickly begin to tank.
In this article, we will discuss the most important things for you to know about developing a growth stock trading strategy. By paying attention to just a few key details and testing your strategies via paper trading, high returns on investment are well within your reach.
What is growth stock trading?
A growth stock is a stock that is expected to increase in value at a rate greater than the market as a whole. While there is no formal cutoff for what makes a stock a growth stock, these stocks are often compared to common indexes such as the S&P 500 and the Dow Jones Industrial Average. Historically, these indexes have had an average yearly ROI of around 10 percent.
Growth stock traders are active traders who believe that they can earn raw returns greater than 10 percent per year. Most growth stocks are relatively new companies that are still in the process of maturing. Rather than achieving gains through the accumulation (and reinvestment of) dividends, these stocks aspire to increase their fundamental value over time. Growth stock trading is not always riskier than value stock trading, but it does rely on fundamentally different principles.
What is the difference between growth stocks and value stocks?
Generally speaking, all stocks will fall into one of two specific categories. Growth stocks, as suggested, are stocks that are primarily focused on offering shareholders value by increasing in value over time. Value stocks, on the other hand, have already gone through their growth phase. People chose to invest in value stocks because their prices are stable and because they can rely on dividends as a source of predictable income.
Growth stocks are more volatile, meaning they will experience a greater range of prices over time. They are also typically newer companies, companies in expanding industries (such as tech), and companies that have recently issued an initial public offering (IPO). Most stocks will experience various phases of the company lifecycle—many of today’s current value stocks were growth stocks at an earlier point in time.
When does it make sense to use a growth stock trading strategy?
In order to know which trading strategy is right for you, you will first need to identify your trading objectives, time constraints, and willingness to tolerant risk. When all else is equal, growth stocks are ideal for individuals who are risk tolerant and are hoping to generate faster returns on their investment.
With value stocks, future profits are predictable. Investing in a company such as Ford (F), for example, will give you access to 6.37 percent dividend yields and prices contained within a small range ($7.41-$10.56 over the course of the year). A growth stock, on the other hand, will likely not offer dividends and can experience a tremendously wide range of values. If you are willing to invest in a stock that swings between $5 and $40 over the course of the year, then growth stock trading may be right for you.
How can I reduce the risk of using a growth stock trading strategy?
In order to develop the best growth stock trading strategy, you will need to implement a variety of different risk management strategies. Fortunately, accessing these strategies is much easier than many people assume.
Diversify: because you cannot be sure which growth stocks are most likely to rise, it helps to investment in multiple different stocks and benefit from the growth of the market as a whole. Diversity is the surest method for reducing asset-specific risk.
Identify Channels: once you can determine where an asset’s price channels are, you can enter near the bottom and exit near the top. Channel indicators, such as Bollinger Bands, will be especially helpful.
Swing Trading: growth stocks often experience significant swings followed by minor retractions. By using moving averages, the relative strength index (RSI), the Ichimoku Cloud, and other predictive technical indicators, you can identify when these swings are most likely to occur.
Be patient: the two biggest psychological risks for traders are greed and fear. Though growth stocks can increase in value, it is still important to allow them to have time to come to fruition. Additionally, you should avoid letting small price oscillations cause you to jump ship. In order to overcome these risks, consider issuing limit orders in advance.
Growth stock trading is something that even inexperienced traders can do with ease. However, if you overlook these important details, your strategy will not be nearly as effective.
Which technical indicators are most useful for growth stock traders?
Technical analysis is very important for anyone hoping to identify stocks that are likely to increase in value. There are many different types of technical indicators available, each with its own share of pros and cons attached to it.
Trend Indicators allow you to determine whether stocks are moving in a positive or negative direction.
Momentum Indicators allow you to determine the strength of the current trend and whether that trend is likely to continue.
Volatility Indicators help you determine the risk of a given position and the ideal timeframe you should adapt.
Volume Indicators look at how often a stock is traded and can help you predict price changes in advance.
The best growth stock trading strategies will use each of these technical indicators. In order to familiarize yourself with these essential indicator classes, begin by trading on paper in advance. This will make it much easier for you to test and compare various techniques for growth stock trading.
Growth stocks are stocks that are yet to realize their full potential value. By investing in growth stocks prior to their maturity, you can earn significant returns over time. Keeping these things in mind, you can develop a growth stock trading strategy that will effectively meets your needs.