Robinhood Trading Strategy – Good For Trading?
Last Updated on April 18, 2023
The conventional commission-based trading approach might reduce your profits and make it challenging to meet your investment goals. What is the typical Robinhood trading strategy among their customers?
A Robinhood trading strategy refers to the strategies of clients of the brokerage. By enabling commission-free trading of stocks, options, and cryptocurrencies, this ground-breaking trading platform makes it simpler for you to build your portfolio and reach financial independence. Because of this, we have witnessed rampant speculation among Robinhood clients.
We’ll go into the Robinhood trading strategies in this article, along with hints and suggestions to help you get the most out of this potent brokerage and tool.
What is Robinhood?
In 2013, Vladimir Tenev and Baiju Bhatt launched Robinhood, a commission-free trading platform. They decided to create a platform that would make investing simple and affordable.
Users can buy and sell stocks, options, and cryptocurrencies with Robinhood without paying commissions and fees. This starkly contrasts traditional brokerage services, which frequently impose “astronomical” fees on each trade. By doing away with these charges, Robinhood enables users to invest even with small sums of money.
But please don’t fool yourself. Despite the name, Robinhood is a for-profit business like any other business and they make sure they make money. They are not taking from the rich and giving to the poor, we might argue the opposite, actually.
What Factors Do Traders On Robinhood Consider When Evaluating A Stock?
Many of the Robinhood traders are inexperienced and new to financial markets. What factors do they look at when they consider a stock?
Traders pay close attention to a company’s earnings reports, which provide insight into a company’s financial performance. They look for information such as revenue and profit growth, as well as any surprises or unexpected developments.
Is this likely to yield good results? We are skeptical because earnings strategies are difficult to trade:
Robinhood traders look at a company’s valuation, including the price-to-earnings ratio, price-to-book ratio, and price-to-sales ratio, to determine if it is overvalued or undervalued.
In theory, this is great. A lot of empirical evidence and factor investing indicate that there are opportunities with such strategies. However, it requires discipline and patience for the valuations to pan out. We suspect Robinhood traders might lack this.
Traders also use technical analysis to evaluate a stock. This involves looking at charts and other data to identify trends and patterns, which can provide insight into where a stock may be headed.
Does technical analysis work? We believe it only works if you somehow are able to quantify it into trading rules that you can backtest.
Personally, we threw our trendlines and charts out of the window in the late 1990s.
News and social media
Traders also consider other data points, such as news and social media buzz around the stock, to determine the sentiments and hype around the stock.
The problem is that news is random and comes daily:
It’s worth noting that this list is not exhaustive, of course, and a trader may also consider other factors.
How Do Traders On Robinhood Manage Risk In Their Portfolio?
Here are a few ways that traders on the platform manage risk in their portfolios:
Diversifying a portfolio (or trading strategy) by investing in a variety of different stocks, sectors, and asset classes can help to spread risk and reduce the overall impact of any individual stock’s performance on the portfolio.
This is very smart. Research indicates that retail investors underperform massively, and one of the reasons is the lack of diversification. Retail traders tend to focus on binary strategies: all or nothing. Unfortunately, most stocks end up worthless so it goes without saying how this ends.
Setting stop-loss orders
A stop-loss order is an order that is placed with a broker to sell a stock when it reaches a specific price. This can help traders limit their losses and avoid significant market downturns.
We are no fans of stop-loss orders, but we believe they serve a purpose for retail traders trading “all-or-nothing stocks”.
Traders might use risk/reward analysis to evaluate their potential returns versus the risks associated with a particular stock.
This makes sense, but it requires knowledge and a plan for it to be effective. Does the typical Robinhood strategy trader have such a plan? We would argue doubtfully.
Traders will consider the percentage of portfolio allocation to a particular stock and try to balance high-risk and high-reward potential.
Nassim Taleb is famous for his Barbell Strategy. Taleb is smart and the strategy makes sense, but we somehow that the average Robinhood trader has any idea about what this is.
Some traders also use options and other derivatives to hedge their portfolios, which can help to reduce the overall risk of their investments.
That said, any hedging technique requires both knowledge and experience – something that takes time (years) to learn and master. If you are interested in the topic we recommend our article about the topic:
One should always consider their risk tolerance level and consult a financial advisor before making any investment decision.
What Tools Do Traders On Robinhood Use To Inform Their Trading Decision?
Traders on Robinhood have access to a wide variety of tools and resources to help them inform their trading decisions. Here are a few examples:
Charting and technical indicators
Robinhood offers a variety of charting and technical indicators, such as moving averages, relative strength index (RSI), and Bollinger Bands, that traders can use to analyze historical price and volume data and identify trends and patterns.
News and research
Robinhood provides its users with various news and research resources, such as analyst reports and real-time market news, to stay informed of the latest market and industry trends.
Social Media Integration
Traders can see the news and sentiments on the stock from social media. For example, Robinhood has a feature called “Robinhood Snacks,” which provides quick and easy-to-digest financial news to its users.
Alerts and notifications
Robinhood provides its users with alerts and notifications on their phones or email, which keeps them informed of significant market events, changes in stock prices, and other relevant information.
Traders also participate in community discussions in forums or groups to exchange information and get an idea of the stock from the crowd’s sentiments.
Traders need to keep in mind that past performance is not indicative of future results and always do their research before making any investment decisions.
What Are Common Mistakes Made By Traders On Robinhood, And How Can They Be Avoided?
As with any investment, trading on Robinhood can be risky, and it’s easy to make mistakes. Here are a few common mistakes made by traders on the platform and some tips on how to avoid them:
Lack of research
Traders sometimes act on news or information without adequately researching the stock, leading to poor investment decisions. It’s essential to take the time to research a stock before buying or selling shares.
Most retail traders are better off by buying mutual funds or ETFs.
Chasing hot stocks
Some traders may be tempted to invest in a stock that has had a recent run-up in price, but this can be a dangerous strategy. It’s essential to focus on fundamentals and long-term trends instead of short-term price movements.
Why do Robinhood traders chase hot stocks?
It’s probably because they are prone to of the strongest negative biases in trading and investing: fear of missing out:
Not managing risk
Many traders may not pay enough attention to managing risk in their portfolios. It might be useful to use stop-loss orders, position sizing, and other risk management tools to limit losses and protect your portfolio.
The problem is that all these things require experience to learn.
Investing with emotions such as fear or greed can lead to poor decision-making. It’s important to separate emotions from investments and stick to a plan.
One of the reasons for Warren Buffet’s success as an investor is that he is extremely level-headed and rational. He doesn’t let his emotions get in the way of his thinking.
Remember that investing in the stock market involves risk, and it’s crucial to understand it before making any investment decisions.
Examples Of Successful Trading Strategies Used By Traders On Robinhood
Traders on Robinhood use various strategies to make investment decisions, depending on the type of asset they are trading. Here are a few examples of potential successful strategies used by traders on the platform:
If you know what you are doing, options can be useful – either for hedging or for speculation. However, options are a zero-sum market where only a few win. Why do you believe you’ll be one of the winners?
Many crypto traders on Robinhood use a “HODL” strategy, which involves buying and holding onto a cryptocurrency for the long term in the hopes that it will appreciate in value over time.
The jury is still out if this is a smart strategy or not. Sadly, we believe most retail traders “buy high and sell low” – the complete opposite of what they should. This happens because traders are driven by greed and fear – at the wrong moments.
One of the most popular strategies stock traders use on Robinhood is “value investing,” which involves buying stocks that are undervalued by the market and selling them when they reach fair value.
Regardless of the strategy they choose, traders should always backtest their strategy and make sure it is consistent with their risk tolerance and goals.
Is Robinhood Good For Beginners?
Yes, Robinhood is a good platform for beginners because the commission-free trading structure makes it easy for beginners to invest even with small amounts of money.
However, we assume most traders should have a bigger bankroll when they start.
Is Robinhood safe?
Robinhood is a SEC-registered broker-dealer and is a member of FINRA and SIPC. This provides some level of protection to its customers. Up to 500 000 of your assets are protected.
What is Robinhood strategy?
There is no single “Robinhood strategy,” as traders use a variety of strategies based on their preferences, risk tolerance, and investment goals. Some examples include value investing, growth investing, and options trading.
In this article, we use the Robinhood strategy as a collective name for the traders its clients use.
Is “No Commissions” Good or Bad?
Not having to pay commissions on trades can be a good thing as it allows traders to invest even with small amounts of money and maximizes returns.
However, no one works for free, no matter what they say. They make money via other routes and we still believe you are better off using a traditional broker like Interactive Brokers (for example).
Why is Robinhood So Cheap?
Robinhood is considered cheap because it doesn’t charge commissions on trades.
What is The Downside to Robinhood?
Some downsides to Robinhood include limited research and educational resources and a lack of access to some products compared to other traditional brokerage firms.
Also, we fear the no commissions lure fool customers into overtrading instead of investing.
Is Robinhood a Good Way to Make Money?
Robinhood, like any other stock trading platform, can be a way to make money. However, it’s essential to conduct thorough research and understand the risks before investing.
If you are no good as an investor or trader, no broker will help you become profitable.
How Much Do You Need To Deposit to Robinhood?
There is no minimum deposit required to open an account on Robinhood. However, we recommend putting in at least 10 000 USD to make sure you have at least some capital to make meaningful diversification.
How Do Traders on Robinhood Decide Which Stocks To Buy or Sell?
Traders on Robinhood use a variety of factors, such as earnings reports, industry trends, management and leadership, valuation, technical analysis, news and social media, and insider trades, to decide which stocks to buy or sell.
That said, we believe most of them are better off if they use some form of quantification. There is only one way to find out if you a positive expectancy, and that is by backtesting your trading ideas.
How Do Traders on Robinhood Determine The Right Amount of Capital To Allocate To Each Trade?
Traders on Robinhood can use many methods to determine the right amount of capital to allocate to each trade. We won’t delve into this but rather recommend you do it simply: just make sure you are diversified into at least ten positions.
How Do Traders on Robinhood Stay up-to-date On Market News And Developments?
Traders on Robinhood stay up-to-date on market news and developments by using the platform’s built-in news and research resources and by monitoring social media and other sources of financial news.
We don’t recommend following the news. News is random and mostly noise. Instead, focus on the process and your trading rules.
How Do Traders on Robinhood Approach Long-term Investing Versus Short-term Trading?
Long-term investors might focus on fundamentals and hold onto stocks for extended periods. In contrast, short-term traders might focus on technical analysis and make quick trades based on market trends.
We suspect too many Robinhood traders are too short-term and overtrading.
Robinhood Trading Strategy – Conclusion
Robinhood is a powerful and accessible trading platform that has changed how people invest by eliminating commission fees. By using the platform, traders can use various Robinhood strategies to make investment decisions, depending on the type of asset they are trading.
However, traders should also be aware of common mistakes and avoid them by thoroughly researching their investments and not chasing hot stocks. Always backtest the strategy that works for you and adapt it over time. However, we fear zero commissions are leading to overtrading.