What Is Strategic Trading: 3 Key Principles

In investing, you want to optimize for growth while avoiding putting all your eggs in one basket.

One way to increase your exposure to growth opportunities while still minimizing risk is by setting aside money in your portfolio for strategic trading.

With strategic trading, you allocate your assets in different sectors, industries, and themes that you might not otherwise consider. 

Erika Taught Me

  • Strategic trading is a way to take advantage of market opportunities without putting your core portfolio at risk.
  • Beta is a way to balance risk and reward in your portfolio.
  • Strategic risk implementation and short-term trading opportunities allow you to take advantage of changing market conditions.

. . .

What Does Strategic Trading Mean?

Strategic trading is the ability to capitalize on different market opportunities that come up over time. 

Think of it as a way to give yourself flexibility with your trading decisions. You can move with the market without affecting your long-term goals. 

What makes strategic trading different from trading in general is that you’re not putting your core portfolio at risk. 

To make strategic trades, you leverage around 10% of your portfolio while keeping everything else protected, so it can continue growing over time.

There are three key principles you can use to become a strategic trader and grow your portfolio. You can use these principles to increase your returns while also limiting how much risk you take.

READ MORE: How To Manage Your Own Investment Portfolio

1. Understanding Beta

Beta — also referred to as equity beta — is a number that measures an asset’s sensitivity to volatility in the market. 

Investors can use beta to understand how well their portfolio is expected to perform in changing market conditions.

Typically, beta moves in tandem with an equity index like the S&P 500. If the market goes up, the beta of your portfolio will tell you how much your portfolio is likely to go up. 

Conversely, if the market goes down, beta can alert you to your risk exposure.

  • A beta of 1 usually means your portfolio is expected to move in line with the market. 
  • A beta greater than 1 indicates your portfolio is more sensitive to price movements.
  • A beta less than 1 is less sensitive. 

Let’s say your portfolio is 1.5. When the market goes up, your portfolio is going to outperform the market. But if your portfolio is only 0.5, your portfolio will underperform when the market goes up. 

The same applies to risk. A portfolio with a beta of 1.5 is going to lose more when markets go down. Meanwhile, a portfolio with a beta of 0.5 is going to lose less when markets go down. 

Beta applies to your portfolio as a whole, as well as individual securities within your portfolio.

How to use beta to invest strategically

The key to beta is finding a balance that aligns with your goals and risk tolerance. While a beta that's higher than 1 increases your exposure to risk, a beta less than 1 limits your opportunity to earn gains generated by changing market conditions.

You can change beta based on your goals and your portfolio’s risk/reward profile. To do this, you change what you invest in. 

For example, to increase exposure to market swings, you can invest in high-beta sector ETFs (exchange-traded funds) like e-commerce or tech. To reduce exposure, you can purchase stocks in sectors like utilities or consumer staples. 

While lower beta securities might generate lower returns, they offer safety that can help mitigate risk elsewhere in your portfolio.

You can also change your asset allocation if you want to change the beta in your portfolio. This might mean selling stocks and buying bonds. You can figure out how much to trade based on your risk tolerance or when you periodically rebalance your portfolio.

Another way to change your portfolio’s beta is to purchase leveraged market ETFs. This is high-risk because it requires you to borrow money to invest. Leveraged ETFs come with higher betas, which can amplify gains — or losses. 

While this might be too risky for new investors, professional portfolio managers use leveraged ETFs to change the beta in their clients' portfolios. 

READ MORE: ETF Investing for Beginners: Choosing the Right ETFs

2. Strategic Risk Implementation

Strategic risk implementation is all about deliberately and thoughtfully injecting risk into your portfolio. 

You can do this across different asset classes, sectors, and themes. The goal is to diversify risk while also optimizing for returns.

How to use risk implementation to invest strategically

One way to do this is by thematic trading, in which you look for long-term structural shifts in the global economy or general themes you want to invest in. 

A good example of this is the rise of artificial intelligence. A thematic trader could invest in a sector that’s capitalizing on AI, or a company like NVIDIA that’s at the forefront of it.

Another way to strategically implement risk into your portfolio is to respond to market conditions. Depending on your goals, you can temporarily move a portion of your portfolio into safer assets like gold or increase your exposure in companies that are capitalizing on market changes. 

War is a good example of this. War can cause instability in the overall market while also offering opportunities for specific companies, especially those in the defense industry, to benefit from it. 

You can change your asset allocation by picking specific securities or by adding ETFs to your portfolio. 

Markets can change rapidly and often unpredictably. It’s important to study markets constantly and use metrics like beta or value-at-risk to understand your portfolio’s risk exposure.

READ MORE: What To Look for When Buying Stocks

3. Capturing Short-Term Opportunities

The last principle to consider is short-term opportunities that affect the market. 

These events are driven by the news, specific events like earnings reports, and changes in consumer sentiment. 

As a strategic trader, your goal is to be flexible so you can capitalize on these events.

Keep in mind that these opportunities may not reflect your core portfolio or your long-term financial goals. They simply come up and present an opportunity for you to take advantage of price swings to increase your portfolio’s value.

How to use short-term opportunities to invest strategically

You can use technical analysis to identify price trends in specific stocks or market sectors. Using historical data and advanced charting tools, you can study upward price movements and identify places in the future where you expect to see specific patterns emerge. 

This will help you identify entry and exit points that allow you to buy or sell securities in your portfolio for a profit.

The challenge with capturing short-term opportunities is that timing is everything. Sometimes short-term trades can benefit you while other times things happen beyond your control and there’s nothing you can do. 

These types of trades are good for tapping into growth opportunities, but they shouldn’t put your core portfolio at risk.

READ MORE: Active vs. Passive Investing: Which Is Best?

TL;DR

There are three key principles to strategic trading: beta, strategic risk, and short-term opportunities.

Beta measures how sensitive an asset is to market volatility. Strategic risk refers to purposely — and thoughtfully! — adding risk to your portfolio by investing in assets that match a shift in the economy. Capturing short-term opportunities is when you time the market to capture trends.

While some aspects of strategic trading are more advanced (like trying to grab short-term opportunities), the overall aim of strategic trading is to grow your portfolio without risking it all.

For more investing insights, check out these episodes of the Erika Taught Me podcast:

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I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

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Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. Terms apply to American Express benefits and offers. Enrollment may be required for select American Express benefits and offers. Visit americanexpress.com to learn more.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. Terms apply to American Express benefits and offers. Enrollment may be required for select American Express benefits and offers. Visit americanexpress.com to learn more.