Basic Stock Trading Strategies
Module 7 – Stock & Forex Trading Basics
7.1 Introduction to Basic Stock Trading Strategies
The stock market can often feel unpredictable, fast-moving, and overwhelming — especially for beginners. Prices rise and fall daily, influenced by news, emotions, and global events. Entering the market without a clear approach is one of the fastest ways to lose money.
Since no trader can predict the future with certainty, the smartest approach is to trade using well-defined strategies.
A trading strategy is a structured method for deciding:
When to enter a trade
When to exit
How much to risk
Why the trade makes sense
Most trading strategies are built using technical indicators, price patterns, and sometimes fundamental analysis. When applied correctly, strategies bring discipline, reduce emotional decision-making, and increase consistency over time.
This module introduces beginner-friendly stock trading strategies and explains how you can start building your own.
7.2 Foundations of a Basic Trading Strategy
A trading strategy only works if it is:
Based on objective data
Clearly defined
Followed consistently
Even the simplest strategy can outperform a complex one if executed with discipline.
When building your own trading strategy, consider the following foundations:
Your Trading Goal
Start by clearly defining why you want to trade.
Ask yourself:
Are you trading for short-term income or long-term growth?
How much time can you dedicate to trading?
How much risk are you comfortable taking?
Your answers will help shape the type of strategy you choose. For example, traders who want lower costs and fewer decisions may prefer longer-term strategies.
Your Trading Style
There are three common trading styles, based on how long trades are held:
Day Trading: Trades opened and closed within the same day
Swing Trading: Trades held for several days or weeks
Position Trading: Trades held for months or even years
Each style requires different tools, mindset, and time commitment. Choose a style that fits your schedule and personality, not someone else’s success story.
Technical Analysis or Fundamental Analysis?
Fundamental analysis focuses on company performance, earnings, financial health, and economic factors.
Technical analysis focuses on price charts, trends, and indicators.
Some traders prefer one approach, while others combine both. As a beginner, mastering at least one method is essential before mixing strategies.
Continuous Evaluation and Improvement
Markets change — and so should your strategies.
By keeping records of your trades, you can identify:
What worked well
What failed
Why certain strategies performed better than others
Maintaining a trading journal helps accelerate learning and reduces repeated mistakes.
7.3 Trend Following Strategy
What Is Trend Following?
Trend following is one of the simplest and most effective trading strategies, especially for beginners.
The idea is straightforward:
Buy in an uptrend
Sell or short in a downtrend
Instead of predicting reversals, trend traders follow the existing market direction.
Identifying Market Trends
Trends are commonly identified using:
Trendlines
Moving averages
An uptrend is characterised by higher highs and higher lows.
A downtrend shows lower highs and lower lows.
Moving averages help confirm trend strength. When shorter-term averages stay above longer-term averages, the trend is usually strong.
A key rule of trend trading is flexibility — when the trend changes, the trader must adapt quickly.
7.4 Support and Resistance Strategy
Support and resistance are price levels where markets tend to pause or reverse.
Support: A price level where buying interest is strong enough to prevent further decline
Resistance: A price level where selling pressure prevents further rise
These levels help traders:
Identify entry points
Set stop losses
Define profit targets
When price repeatedly bounces from a level, it becomes more significant. However, when support or resistance breaks, it often signals a new trend or strong momentum.
Support and resistance work best when combined with other indicators such as moving averages or trendlines.
7.5 Risk Management in Trading Strategies
No trading strategy works without risk management.
Even the best setups can fail, which is why controlling losses is more important than chasing profits.
Minimise Losses
Losses are unavoidable in trading. The goal is to:
Keep losses small
Protect capital
Stay in the game long enough to succeed
Control Capital at Risk
Never risk too much on a single trade. A common rule is to risk 1%–2% of total capital per trade.
This approach helps traders survive losing streaks without damaging their accounts.
Cut Losses Quickly
Holding onto losing trades out of hope often leads to bigger losses. Stop-loss orders remove emotion and enforce discipline.
Avoid doubling down to recover losses — this is a common mistake that increases risk.
Stick to Your Rules
Discipline is what separates consistent traders from emotional ones.
Once rules are defined:
Follow them strictly
Avoid impulsive decisions
Trust the process
Diversify Your Positions
Diversification spreads risk across different assets or markets. If one position performs poorly, others may balance the loss.
While diversification doesn’t eliminate risk, it helps reduce the impact of unexpected events.
7.6 Backtesting and Practice
Backtesting allows traders to test strategies using historical market data before risking real money.
Benefits of backtesting include:
Understanding how a strategy performs in different market conditions
Identifying weaknesses
Building confidence
Most modern trading platforms provide tools for backtesting and demo trading, making it easier for beginners to practise safely.
Module Recap
Trading strategies bring structure and discipline to trading
Choose strategies that align with your goals and lifestyle
Trend following and support-resistance are beginner-friendly strategies
Risk management is essential for long-term success
Backtesting and journaling improve performance over time