Men like Warren Buffet, John Templeton, and Benjamin Graham grew famous through employing the trading strategy known as Buy and Hold. This involves carefully choosing a stock based on the company’s fundamentals, which include things like their management, balance sheets, and income statements. The aim would be to invest in a stock with solid fundamentals behind it, but which, at the present time, is undervalued for certain reasons. Then, it’s a question of waiting – usually a period of several years – for the value of the stock to rise.
Those who choose to invest in this way are basing their approach on the statistical evidence that the market tends, overall, to rise more than it falls. When the market is robust, the returns they receive can be re-invested to improve their positions. When the market slumps, they hang on in the faith that things will, sooner or later, get better.
The Buy and Hold Strategy usually works best with stocks that are called blue-chip, which means they boast a long resume of good management and healthy earnings. Companies like IBM, Apple, or Coca Cola spring to mind as examples. It’s these stocks that tend to display the grit needed to get through difficult times and come back to excel later on.
By contrast, day trading is a different sort of activity which concentrates on gleaning from the daily price fluctuations of financial instruments. Day traders’ minds are quite busy – occupied as they are with the task of keeping track of all the events that might trigger price movements in their instruments.
Aside from keeping you active and alert, there are other things that distinguish day trading from the more traditional Buy and Hold strategy. In this article, we’ll touch on some of them as we try to answer the question of whether Buy and Hold has, two decades into the twenty-first century, finally met its end or not.
Buy and Hold
If you’re a proponent of Buy and Hold, you’re not so concerned about determining the perfect time to enter or exit a trade. The work goes more into identifying the right stock for you, and this will involve a certain amount of research. After you’ve done that research, however, working on the trait of patience becomes your main task.
Buy and Hold need not imply that you never make any changes to your portfolio at all. You could leave it fairly stable but step in at intervals to make crucial adjustments. You’re still taking the approach of relying on the larger uptrends in the market.
Followers of Buy and Hold face the challenge of saying goodbye to large amounts of capital for long time periods, and without knowing for certain what the end result will be. After all, it does sometimes happen that a stock that’s considered blue-chip finds itself wiped off the map, as we witnessed in the case of Enron after their illegal business activities were brought out into the light.
You could guard yourself against this sort of thing through diversifying your portfolio. Even if one “Enron” goes under, it’s unlikely several will. Also, you could invest in a fund that tracks a stock index like the S&P 500, which reduces your risk in a similar way.
Day traders use the various features available on online trading platforms to identify patterns in their financial instruments’ prices. Today’s technology makes it much easier than it once was to benefit from chart patterns and the hints they give about future market activity. A well-liked example is the candlestick chart, which visually represents a lot of useful information about traders’ buying and selling behavior in compact form.
Technical analysis is more to the point for day traders than fundamental analysis, and they have to invest time in order to learn it properly. Day traders also need an understanding of how the markets work, and what factors drive individual assets like oil, forex, or cryptocurrency. Oftentimes, they will incorporate the technical analysis they’ve learned and the financial news they’ve read into their own personal strategy, rather than merely imitate others’ methods. On the other hand, while they are still in the learning process, it will probably help him to observe the professionals at work.
Day trading with CFDs (contracts for difference) is unique in that you are not actually buying or selling, say, any actual barrels of oil. Rather, you are buying a contract with a broker about the future price activity of oil within a given time frame. If oil prices follow your prediction, whether it’s up or down, you will see earnings in proportion to the size of your deal.
The Buy and Hold strategy has not yet met its end. The truth is, whether you choose this approach over day trading or not depends more on your goals than anything else. Day trading is favored by those with an interest in making short-term gains off of price movements, while people with long-term financial goals, like building a retirement fund, usually choose Buy and Hold.