The Best Investment Strategies For The Continuous Market

A continuous market refers to a type of financial market where trading occurs continuously during specified hours, allowing for the purchase and sale of assets like stocks, bonds, commodities, or currencies throughout the trading session. In a continuous market, prices are constantly updated based on supply and demand, and transactions can be executed at any time while the market is open.

Examples of continuous markets include major stock exchanges like the New York Stock Exchange (NYSE) and NASDAQ, as well as currency exchange markets in the foreign exchange (Forex) market, which operates 24 hours a day during the business week across different time zones globally.

In contrast to continuous markets, there are also “call markets” where trading occurs at specific times in sessions, and transactions are executed at a single price determined for each session.

An investment strategy is a comprehensive plan or approach designed to guide an investor’s decisions in order to achieve specific financial goals. It outlines the criteria for selecting investments, the allocation of assets across various types of investments, and the risk management techniques to be employed. A good investment strategy takes into account factors like time horizon, risk tolerance, investment objectives, and market conditions.

A strategy must also be as objective as possible so that buy and sell signals become obvious. The rule that simplicity always works better is gold in the world of investments. In this way, investors can manage to avoid arbitrariness and improvisation, which are both harmful elements in the investing world.
Developing a personal investment strategy usually requires time, trial and (unfortunately) error. Once you acquire the necessary knowledge, you will likely find yourself testing different types of strategies that best fit your investor profile. The best way to do this without risking finances is to practice and stress-test using a broker demo account (also called paper trading).

The objective of any investment portfolio is to provide a return on the capital (money) invested. To do so, the portfolio must be properly diversified and take into account three key factors:

• The Investment Goals: What does investment success look like to you? For some people it’s having a portfolio cross a certain amount threshold, while for others it might look like an annual dividend income amount.
• The Time Horizon: How long do you expect to be investing? This can be short, medium or long-term; anything from today (intraday trading) to later this month (swing trading), this year (medium-term trading) or longer (long-term trading).
• The Risk Profile: Taking greater risks with an investment portfolio may yield bigger returns, but it also opens the door for greater drawdowns (losses). If you don’t feel confident that you’d be able to keep a cool head when the markets are particularly volatile, then you may be considered a more conservative investor, rather than moderate or aggressive.

The differences in investment strategies between continuous and call markets are largely driven by the structure and mechanics of the market types:

1. Liquidity and Execution: Continuous markets offer immediate execution and higher liquidity, which suits short-term and high-frequency trading strategies. Call markets’ periodic trading sessions and batch processing require more strategic and often longer-term approaches.
2. Price Discovery: Real-time price discovery in continuous markets accommodates strategies that rely on intraday price movements. Call markets, with their single clearing price per session, offer less frequent price updates, demanding different timing strategies.
3. Volatility and Risk Management: Continuous markets can exhibit significant intraday volatility, allowing for risk management strategies that can respond quickly to market changes. Call markets typically have more stable prices between sessions but may face significant price changes at the call time, leading to different risk management tactics.

By understanding these differences, investors can better tailor their strategies to align with the operational dynamics and opportunities presented by each market type.

With this in mind, let’s take a look at analysis types, followed by a breakdown of 8 popular investing strategies.

Investment analysis is the process of evaluating an investment for profitability and risk. There are several types of investment analysis that investors and analysts employ to make informed decisions. Here are some of the most common ones:

Focuses on evaluating a security’s intrinsic value by examining related economic, financial, and other qualitative and quantitative factors.

Key Factors: Includes economic conditions, industry conditions, company financials (such as earnings, revenue, profit margins, and financial statements), management quality, and competitive position.

Analyzes statistics generated by market activity, such as past prices and volume. It primarily uses charts and other tools to identify patterns that can suggest future movements.

Key Factors: Includes price trends, chart patterns, trading volume, and various technical indicators like moving averages, relative strength index (RSI), and Bollinger Bands.

Uses mathematical and statistical models to evaluate investment opportunities and quantify risk.

Key Factors: Involves the use of financial ratios, statistical models, and algorithms to predict future trends and identify undervalued or overvalued securities.

This method looks at non-numerical factors that can affect an investment’s performance.

Key Factors: Includes management quality, brand value, customer satisfaction, company culture, industry conditions, and regulatory environment.

Let’s take a look at some of the most popular investment strategies.

This is an investment strategy that involves selecting stocks which appear to be undervalued in the market. The goal is to buy these stocks at prices lower than their intrinsic value and profit when their market price rises to reflect their true worth. The strategy relies on thorough analysis to identify discrepancies between a stock’s current market price and its intrinsic value.

It consists of looking for undervalued shares based on fundamentals such as P/E ratio, strong balance sheets and DCF analysis. Once found, these equities are bought and over time the market is expected to ‘catch up’ with the price where the shares should be. Often, investors will set a percentage threshold for how undervalued a stock should be before purchasing (such as a 25-40% gap in fair value.

Growth investing is an investment strategy focused on capital appreciation. Investors who employ this approach seek out companies that demonstrate signs of above-average growth, typically in terms of revenue, earnings, or cash flow. Growth investors aim to invest in companies that are expected to grow at an accelerated rate compared to the overall market or their industry peers.

This consists of investing in companies that are growing and expanding, and that can be innovative in their respective sectors. Commonly this includes those linked to the world of startups and technological fields. Another usual aspect is those companies that do not distribute dividends or buy back shares because they reinvest all profits in their business to continue growing.

These are investments with a shorter time horizon than value stocks and the theoretical potential for profit is greater, although so is the risk of loss.

Created to be made up of the shares from the Dow Jones index, this portfolio is also perfectly valid upon using other indexes. (e.g. “Dogs of the FTSE” or “Dogs of the IBEX”.)

It consists of taking the 10 highest-dividend-yielding shares from the index based on the end of the final session (last trading day) from the previous year. Of these 10 companies, the investor purchases the same number of shares (important to note that this is not the same as investing the same amount into each stock). The stocks of these 10 companies are then held for the full year.

For investors who are focused on income rather than growth, this strategy focuses on buying shares of companies known as dividend royalty. That is, either Dividend Aristocrats or Dividend Kings. While there are no weighting percentage ‘rules’ for this portfolio type, the companies themselves must:

• Have distributed and increased the dividend for at least 25 (for Aristocrats) or 50 (for Kings) consecutive years.
• Be part of the S&P 500 index.
• Have a minimum market capitalization of $3 billion.
• Have a minimum average daily trading volume of $5 million.

This strategy is for the medium or long term and consists of investing in shares that are highly exposed to fluctuations caused by the economic cycle, so that they are bought during the bottom of the cycle (which is when they are suffering and are cheaper), and sold when the economic cycle is ending or near its end (when their price increases and sometimes even surpasses their intrinsic value).

Cyclical stocks are usually banking and financial stocks, stocks of consumer durable goods, construction and luxury goods companies.

A contrarian investment strategy involves making investment decisions that go against prevailing market trends or sentiment. Contrarian investors believe that the majority of market participants can often be wrong, especially during periods of euphoria or despair. By taking positions that are opposite to the crowd, contrarian investors aim to capitalize on market overreactions and mispricings.

Technical analysis allows investors to mix and match their personal ‘investment rules’ based on quantitative data. A big benefit of this approach is that it helps to remove many human biases and are straightforward to use for both entry (buying) and exit (selling) points based on the ‘rules’ each investor decides best fits their plan.

The golden cross is a widely recognized technical analysis pattern and it occurs when a short-term moving average crosses above a long-term moving average, suggesting a potential shift from a bearish (downward) to a bullish (upward) market trend. It essentially serves as a corroboration of a current upward trend.

A golden cross is identified when the 50-day moving average crosses above the 200-day moving average on a stock’s price chart. It performs better during periods of market stability and growth. In highly volatile or sideways markets, it may produce false signals – it’s best used to keep investors in the market during substantial positive price movements.

This pattern signifies an exceptionally bearish signal (useful for investors whose strategy includes shorting stocks), indicating potential severe downside in the market. It combines the traditional “death cross” with another layer of complexity by involving three different moving averages.

A Triple Death Cross occurs when a short-term moving average (e.g. 50-day MA) crosses below the medium-term moving average (e.g. 100-day MA), and both of these shorter moving averages subsequently cross below the long-term moving average (e.g. 200-day MA).

This pattern is considered significantly bearish because it shows that short-term and medium-term prices are dropping faster relative to the long-term price trend, suggesting strong downward momentum.

A support is a price level where the interest of buyers is greater than that of sellers. This implies that there are more buy orders than sell orders, so generally when the price falls and reaches a support, this level is thought to act as a floor, preventing the price of the asset from falling further. The concept of support is based on the behavior of buyers and sellers and their perception of value at certain price levels.

A Fibonacci support, for example, is based on the Fibonacci sequence, which is a series of numbers in which each number is the sum of the two preceding numbers (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, etc.). Once calculated, Fibonacci levels are areas where, once the price falls and reaches them, they act as supports.

Using supports as part of a wider investment strategy involves waiting until a stock’s price hits a support before buying.

Criteria to know if it’s a strong support

• Number of times tested: The longer the price acts on the support, the stronger the support.
• Elapsed time: The time distance from the current moment to the period when the level was formed. The longer the time, the stronger.
• Volume: The more volume that has been traded at the support level, the stronger it is.

This occurs when the price is moving within the range of the triangle, which is formed by a bullish lower trend line and a bearish upper trend line. In this way, investors can see that the highs are decreasing and the lows are increasing.

It is a trend continuation pattern. When the market is bullish, it takes a breath (the moment when the triangle is formed) and when it breaks above it, (when the price exceeds the bearish trend line of the triangle), it generates a buy signal and continuation of the previous bullish trend.

While the above examples may seem overwhelming if you’re a new investor, there is a tool that is able to help develop a robust investment strategy, offering ideas, easily showing the necessary information without introducing human error, and saving time and money.

The premium investment tool InvestingPro even offers investment portfolios that you can copy and replicate. Examples include a portfolio with stocks that outperform the S&P 500, another with undervalued stocks, a portfolio focusing only on mid-cap companies, and you can even access Warren Buffett’s stock portfolio. 

Each month, these portfolios are rebalanced to remove and include relevant stocks. THeir results against the S&P500 benchmark speak for themselves.

The results say that these portfolios have widely beaten the market in the long-term.

Thanks to InvestingPro ’s premium investment tool, investors can easily discover undervalued stocks based on their fundamental fair value or price.

In this example taken directly from InvestingPro, the shares of this company (Ternium) are trading at $34.07 and its fair value average is $49.43, which creates an undervaluation of 45.1%.

Investors also have access to the ratings and opinions that institutions issue on the shares, whether they recommend buying, holding or selling, what target price they give and why. This information gives greater security and control over investment choices.

In addition, investors can filter and select stocks based on many interesting criteria. For example, you can ask InvestingPro to show you cheap US stocks based on their P/E ratio, or European stocks that have performed well, or stocks with a higher dividend yield, stocks that are in good financial health, stocks with higher or lower volatility, by beta, by risk, etc. The possibilities are myriad; simply choose the criteria and immediately have a list of corresponding stocks.

Financial goals are concrete targets that we set for ourselves and that help us create and organize an action plan. They vary according to our needs and situations and should therefore be revisited periodically. Investors will often set short, medium and long term objectives that then define the time horizon of the primary investment strategy.

Two elements come into play in this equation: potential gain and the risk level that you’re comfortable taking to achieve it. The general (but not absolute) rule is simple, the greater the risk taken, the greater the potential gain. And vice versa, the less risk we take, the less potential gain.

As the famous quote says, “Time in the market beats timing the market.” The earlier you begin investing, the more time your money has to grow through the power of compound interest. Starting early also allows you to weather market fluctuations and gain valuable experience over time.

Don’t try to overreach right at the start and involve your strategy with securities that are more difficult to understand. Especially those with massive volatility (refer back to the honest risk profile step).

Selecting a reliable stock broker is crucial for ensuring security, low transaction costs, and access to the necessary tools and customer support for successful trading. Research thoroughly to find a broker that aligns with your investment goals, trading style, and financial needs.

Effective risk management helps protect your investments from significant losses and ensures long-term financial stability. By setting stop-loss orders, diversifying your portfolio, and not over-leveraging, you can navigate the markets more safely and confidently.

Minimizing losses by exiting unprofitable trades quickly can preserve your capital for better opportunities. Allowing winning trades to run, while using trailing stops to lock in gains, maximizes your potential returns and capitalizes on market trends.

Patience, discipline, and consistency are crucial traits for successful investing, helping you to stick to your strategy despite market volatility. Staying committed to your long-term goals prevents impulsive decisions that could undermine your financial progress.