The Easiest Investing Strategies for Beginners on Robinhood in 2021
Are you looking to try your investing but don’t know where to start? Or, have you started investing but feel like you don’t really know what you’re doing? Whatever the case, you’re at the right place.
While this guide is tailored to Robinhood users because I use Robinhood chart screenshots, the strategies described can be applied to any trading platform of your choice.
Disclaimer: This article is long. You don’t need to read everything to start investing/trading. It is ordered in a way that you can begin doing some simple trades by just reading strategies 1 and 2. If you want an introduction to some technical analysis to enhance your trades, this article will provide that for you as a starting point.
Before Investing/Trading
There are a couple things I want to make clear. First, this is not a get rich quick scheme. Second, becoming a good investor takes time. Third, we need to be more like computers and make decisive trades that fit our trading criteria while consulting our human intuition when we are in grey areas.
Keep your expectations in check. What I write here is not going to result in massive realized gains overnight. However, I do hope that my suggestions will help you become a disciplined investor who understands why they are making their investing choices. While I discuss well known investing strategies, I will also offer some ideas on how to refine them based on my experience.
If you are interested in signing up and would like to use a referral code to get a free stock, here is my link. Full disclaimer: I will get a free stock as well for the referral.
How much do I need to start?
To answer that question, what percentage of your liquid assets would you like to have invested? How much of that are you okay with seeing a double digit percentage loss? The stock market has its ups and downs. When realization that the coronavirus was going to have a big reckoning along with other economic factors, the S&P 500 dropped 12% within a week from March 4 to March 11, 2020. The S&P 500 usually does not drop this violently, but sometimes it happens and you need to be aware of that.
For starters, I would suggest investing around $1000-$2000. If that represents the majority of your disposable income, start with a few hundred dollars or less, whatever feels most comfortable to you. You want to start small and then slowly size up as you get the hang of things. Of course, realizing gains in your small account and making smart reinvestment decisions will also allow you to slowly build to a bigger account.
Part of the decision of how much to put in to the market also depends on your risk tolerance and management style. Are you planning on actively managing your trades or are you completely good with holding for the long term? If you are more of the former, you are leaning more towards a trader rather than an investor. There’s nothing inherently bad about trading, but since trading is much more active than investing I would starting with a smaller amount of capital if you know you really want to get into trading.
Which stocks should I invest in?
For beginners, I recommend starting with index funds. According to Forbes, index funds are securities that track market indices, which measure the performance of large groups of assets of similar type. Index funds can often offer higher degrees of diversification, liquidity, and stability than individual stocks.
If you have tuned into any kind of market news before, you probably heard of the Dow Jones, Nasdaq, and S&P 500 indices. A good overview on what they are and what they track can be found here.
Personally, I like the S&P 500 so I will recommend different index funds tracking the S&P 500. There are many other fantastic options out here, so feel free to do your own research as well.
For accounts below $1000:
- SPDR S&P 500 ETF Trust (SPY): This is my go-to stock to purchase if I am looking to invest some money, investing conditions are met, and I’m not looking to invest in a specific stock. Current trading price at time of writing: mid-$300s
- Invesco QQQ (QQQ): This fund tracks the Nasdaq 100 Index and is spread across several different sectors. Technology comprises over 50% of the fund’s holdings. Current trading price at time of writing: high-$200s
For accounts under $1000:
- iShares Russell 2000 ETF (IWM): This fund tracks small cap stocks and is among the most heavily traded Russell 2000 ETFs. Current trading price at time of writing: mid-$100s
- PowerShares S&P 500 High Dividend Low Volatility (SPHD): According to etf.com, this fund tracks the 50 least volatile names from the S&P 500’s 75 highest dividend yielding securities. This fund also pays out monthly dividends, meaning that you can expect a small payout every month for just owning this stock. As a high dividend yielding stock, expect to see the share price dip after it passes its ex-dividend date. This is normal, and the share price should recover from that with all other conditions equal. Because it is less volatile, it tends to move less than SPY for better or for worse. Current trading price at time of writing: mid-$30s
You can definitely invest in a mix of all the stocks I’ve mentioned as long as the size of your account permits it, but I just wanted to give you an idea of how many shares you might be able to buy with your account. For reference, I personally have positions in SPY and SPHD.
Now that you have an idea of your account size and some stocks you can trade, let’s talk strategies.
Strategy 1: Buy the Dips
This sounds deceptively simple and makes sense, but our natural inclination to act out of fear of missing out (FOMO) make us want to jump on the bandwagon when a stock skyrockets and get out when it looks like it’s free falling.
This strategy is as simple as buying a stock when it is trading lower. However, here are the conditions I look for to fine tune what I mean by “trading lower”:
- Share price is below its price at open (the price it was trading at when the markets opened at 9:30am EST)
- Share price is below its previous day close (the price it was trading the previous day when the markets closed at 4:00pm EST)*
- Major indices are showing similar downtrend- if you have chosen a stock ETF like the ones I suggested below, the two conditions above are all you need. Otherwise if trading an individual stock, I would check the indices to verify that the overall market is trending down.
There are also extended trading hours, but the primary trading window is between 9:30am EST and 4:00pm EST
The white arrows in this 3 month chart from Robinhood of SPY shows dips that follow my criteria.
When buying, I suggest placing trailing stop orders. This way, instead of buying the stock at its trading price, you can “trail” the price by a set amount. For example, if a stock is trading at $100 and you trail by $0.50, your order will only execute when the stock has risen past $0.50 the lowest it traded since your order was put in.
This strategy will help you develop patience and discipline. Good investing should be relatively boring. As long as the market is in an uptrend, don’t buy anything with this strategy. The goal is not to capture the absolute bottom but to better identify buying opportunities and take advantage of them.
Tip: Especially when the market has been an uptrend for over 3 consecutive days, the likelihood of a selloff increases. If the market starts trading lower but not by much, you might see a second or even third red day in the market. Because of this, you might want to buy in only a little bit on the first red day that matches these conditions. When the second consecutive red day arrives, buy in the same or more as you did on the first day if possible. Save some capital for a potential third red day.
Strategy 2: Sell the Highs
Together with the previous strategy, this is also collectively known as the “buy the dips, sell the rips” strategy. I decided to separate them because there might be situations where you are just looking to buy and hold. For example, if you buy and sell a stock within a year, you will be subject to capital gains tax. This won’t be much of an issue for longer term investors, but the increased tax is definitely something to consider if you are looking to capitalize on short term gains.
Learning when to sell is very important. After all gains aren’t realized until you exit a position. So, when to sell then? Personally, I like to sell stocks that have seen 3–5% increases from my entry price. If I have been holding a stock for under a month and it has gone up over 3%, I will start selling. For stocks that I have been holding longer than that, I look to sell after it has increased over 5%. You can decide what percentage increases feel good to you.
You might have noticed that the SPY has been hitting all time highs in my chart as of late. How do we capture the gains there? What I discuss here relates to attempts to time the market to take profits, and it’s unfortunately not as perfect as the buy and sell points that I have marked out on the SPY chart. But, practice makes progress, and I encourage you to try out what you are comfortable with and develop a winning strategy that you like.
The market generally wants to trend higher, and you often will see consecutive green days. Here are the conditions I want to see met:
- Share price is above its price at open.
- Share price is above its previous day close.
- Share price is _% above my entry price (fill in the blank with your target percentage).
Note: The overall market could be trending down, but your stock might meet all of these conditions. Some stocks will trade higher on good news or analyst upgrades and break from the overall market condition. As long as our conditions are met, we want to take profits. This is different from the previous strategy where we prefer to buy when the overall market is trending down.
I recommend also selling stocks with trailing stop orders. Once a stock has hit your price target, you can also use a stop limit order. Set the stop to the minimum price at which you want to take profit, and set the limit to where you think the stock could potentially trade up to. For example, your stock is trading at $100.50 and your profit target was at $100. You might want to see if it could go to $101, so you put in a stop limit sell order with a stop at $100 and a limit at $101. This way, if the stock starts dipping below $100 instead of going up more, you are out at $100 and have realized profits.
Tip: The enhancement here is very similar to the previous strategy’s. For this, you want to keep track of the overall market. If it’s a green day and your stock has met your selling criteria, sell a small portion. Sell more on subsequent green days. If it’s a red day, but your stock is still trading up, I would consider selling a larger portion as the stock is not moving with the market.
Example: What should be done in this position where SPY has been trending higher and higher in the past week?
As for me, I’ve been following my rules and selling some shares at the last two sell white arrows indicated on the graph. I like to hold on to a few shares (up to 10% of my initial investment) so that I can capture remaining upside. Of course, that means that those remaining shares are also subject to any market movement down. But at this point, I only have 3 shares that I am still holding. I have quite a few options positions open, but that is another topic that I plan to write a separate article on.
I sold most of my position because the S&P has been at all time highs for the past week, and based on what I have seen in the past with the S&P, it is due for at least a small pullback. By selling most of my shares, I have capital ready to buy in more once that dip does happen.
Strategy 3: Execute trades during these three hours of the day
I recommend that you execute trades during the first two hours after market open (9:00–11:00am EST) and the last hour before market close (3:00–4:00pm EST).
These trading windows typically see the highest volume of trading activity, and I execute almost all of my trades in these timeframes. I usually finish all my morning trades by 10am EST, but sometimes there are morning announcements that come out after that time that can affect trading activity.
General Tips
Identify resistance and support
Resistance and support are words often tossed around by traders. When a stock hits a resistance level, the stock will have a harder time trading above that level. On the contrary, we say that a stock has support at a certain level if we expect the stock to trade above that price.
There are many ways to identify support and resistance levels. Of course, you can get more sophisticated reads with different charts and indicators, but you can still get a general sense with a simple line graph like the one offered by Robinhood.
If you really want to venture further but want to stick to Robinhood, the Robinhood website offers some basic indicators (simple moving average and exponential moving average) that you can take a look at.
Since Robinhood doesn’t show the price of the stock in its default view, I pulled the 4 month chart for SPY from stockconsultant.com and then on my own, marked two dotted lines to show some approximate support and resistance lines. You can see in the past 3 months, SPY bounces when it hits a $320 share price. It failed to cross $357 in September and then failed again in October.
When a level is broken, then it becomes the opposite of what it was originally. The $357 line used to be resistance but in November, SPY has broken above it and now it is acting as a support level. Indeed, since the second week of November, SPY has not traded under $357.
Read the news
The markets are constantly moving based on current events. My naive and free approach involves opening the Stocks app on my iPhone and reading a few of the articles discussing how the market is moving. I typically like to do this after hours in the evening and in the morning before market open just to get a quick sense of how things are moving after market. With the Stocks app, you can also add stocks to a watchlist.
During the day, I will check the general news apps on my phone to see what’s happening both inside and outside of the stock market. I started reading the news on a daily basis before I started trading so this is just a continuation of that routine for me.
Ready to get started?
If you haven’t already, create a brokerage account and go on and get started! I would love to hear what your experiences are like. Let me know your thoughts or questions in the comments below.
If you found the article helpful and are about to create your brokerage account, I have some referral links that can get you some free stocks. No worries if you prefer not to use the referral links- you can simply delete the referral part of the URL or search the brokers to go to their main website.
I know I talked a lot about Robinhood in this post, but another free broker that has much better charting available is WeBull. I encourage you to check both out and find which one works better for you. Personally, I have still been using Robinhood because I prefer their mobile UI, but I have tried out WeBull as well. Plus, getting free stock never hurts :)
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