Trading Strategies

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Trading Strategies

Trading strategies streamline a trader’s financial targets. The best trading strategies largely depend on how and when you want to trade, considering risk tolerance and current trends and patterns. According to statistics, the largest stock exchanges by market capitalisation of top domestic companies in 2022 were in trillions of U.S. dollars. These figures indicate that there are plenty of trading opportunities for investors. However, without a solid trading strategy, you can still lose a considerable amount of money trading in markets like stocks or forex. While there’s no guarantee of success in trading, it’s best that you understand the trading strategies and how to use them in the financial markets. This article discusses the trading techniques that can benefit beginners and pros. This handy resource can give trading enthusiasts the knowledge and confidence to help manage risks and profit from trading. Developing an approach or methodology that works for you takes research, time, and effort. You also need to factor in your character traits, asset preference, risk tolerance, and financial resources. If you need a platform to learn essential trading strategies and tips to start your trading career, visit EverythingTrading.com. Sign up today to access free trading courses and use the same tools professional traders use.

Understanding Trading Strategies

You must be open to the different approaches in trading and choose which ones work best for you. The following sections discuss these strategies and what you must consider when buying and selling stocks to earn a profit.

What Is a Trading Strategy?

Trading strategies are systematic methods you can use to buy and sell securities. Such strategies rely on predefined rules and criteria that can help you make trading decisions. Trading strategies may be simple or complex and involve the following considerations:
  • Investment style, such as whether you are growth- or value-oriented
  • Technical indicators
  • Market capitalisation
  • Industry sector
  • Fundamental analysis
  • Holding period or time horizon
  • Risk tolerance
  • Level of portfolio diversification
  • Leverage
  • Tax considerations

What Is the Difference Between Trading Style and Trading Strategy?

Although it seems the terms “trading style” and “trading strategy” mean the same, there are essential differences between these terms that you should know. A trading style is an overarching plan that describes how you will trade in general and how long you will keep your positions open. Meanwhile, a strategy is a specific methodology for determining which price points you will enter and exit trades.

The Downside of Trading

Trading requires plenty of research, work, and time to develop and practise your strategies. Sometimes, you may need to trade daily or perform this activity full-time. If you cannot spare the effort and time for these things, you may find trading difficult to handle. However, if you find the activities associated with trading enjoyable or you have a good tolerance for its risks, you may thrive in and eventually profit from trading.

Special Considerations

Trading strategies can help you avoid behavioural biases and ensure more consistent results. You’ll know when to exit a trade so you don’t hold on to stocks that have lost value or sell those with increasing values.

Knowledge Is Power

Knowledge is more than just learning trading procedures. You must also keep up with recent market news and events affecting your assets. Such developments include interest rate changes, leading indicator announcements, and other economic and financial information. Keeping yourself informed about the events influencing your chosen asset’s performance can help you decide when to enter or exit positions. To learn more about trading in today’s financial environment, visit EverythingTrading.com, the premier online learning platform for all your trading needs.

Set Aside Funds

When trading, assess the capital you’re willing to risk on each trade and commit to that amount. Successful day traders can stake less than 1% to 2% of their accounts per trade. Suppose you have $5,000 in your trading account and are willing to risk 2% of your capital per trade. Your maximum loss per trade should be $100 (2% of $5,000 = $100).

Set Aside Time

Trading requires time, attention, and sometimes dedication to commit daily working hours to trade. If you don’t have time to spare, trading may not work for you. One reason for allocating this much time is that you need to track the markets and find opportunities that may arise during trading hours.

Start Small

If you’re a beginner trader, consider focusing on trading one or two assets. Limiting your trades to a few stocks can help make tracking and finding opportunities easier.

Avoid Penny Stocks

Penny stocks are usually illiquid (not easy to sell), and your chances of winning trades with them are often low. Also, major stock exchanges often delist penny stocks trading below $5 a share. Consider steering clear of these stocks unless you see a real profit opportunity with them based on your research.

Time Those Trades

The orders you place in the morning start executing as soon as the markets open, contributing to price volatility. If you’re a beginner trader, consider observing the market without making any trades for the first several minutes. As you gain more trading experience, you can recognise these patterns and time your orders to make profits.

Cut Losses With Limit Orders

Limit orders can help you confidently trade because they let you set the price your order should execute. This way, you can cut your losses when market reversals happen. If the market doesn’t reach your target price, your limit order won’t execute, and you’ll maintain your position.

Be Realistic About Profits

Your strategy does not always have to succeed for you to become profitable. Many successful traders profit from only 50% to 60% of their trades. However, the amount these traders make on these winning trades is more than the amount they lose.

Stay Cool

Sometimes, your trade doesn’t go in the direction you want. Still, as a day trader, you must learn to control emotions like greed, hope, and fear. Make trading decisions using logic instead.

Stick to the Plan

Successful traders can make trading decisions quickly because they have a strategy and the discipline to stick to it. If you want to be like these traders, develop and follow your formula instead of trying to chase profits.

Trade Small Size – Be Careful

Whether you’re a beginner or experienced trader, consider trading smaller position sizes and don’t put your entire stake into one trade. For example, you can spread smaller trades over multiple time frames instead of entering one large position. Trading small allows you to survive adverse movements against your position. As you make more trades, you’ll experience days when most of your positions go the other way.

Put Aside Money for a Rainy Day

Just like what you do when trading small, don’t put all your capital into one trading account. Consider placing money in financial instruments like mutual funds that provide long-term appreciation.

Be Careful With Leverage

Some online traders offer leverage that lets you make trades worth more than your capital. If you have $100 in your account, a 100-to-1 leverage allows you to trade up to $10,000 worth of assets ($100 x 100 = $10,000) However, leverage can also cause you to lose substantial money. If you lose 50% of your trade, you’ll need a 100% rise to break even. To demonstrate, let’s say you have a stock that drops 50%, from $100 to $50 ($50 ÷ $100 = 50%). For its value to return to your initial purchase price of $100, the stock’s price must rise by 100%, or $50 ($50 ÷ $50 = 100%). Keep this simple mathematics in mind to avoid losing more money than you realise. So, if a stock drops 20%, for example, it has to rise by 25% to break even, based on the table below.
Percentage Loss Percentage Rise to Break Even
10% 11%
15% 18%
20% 25%
25% 33%
30% 43%
35% 54%
40% 67%
45% 82%
50% 100%

Avoid Obvious Mistakes

Profits tend to take care of themselves if you can avoid common mistakes like making too large trades, relying too much on leverage, or failing to cut losses. Avoiding these blunders can help minimise your losses. To help you steer clear of these errors, visit EverythingTrading.com. You can use our platform as your trading resource of ET tools to give you an edge in the market.

Make Sure You Understand Yourself

Consider doing some self-reflection and identifying the potential mistakes you’ll likely make. Even very profitable strategies won’t make you money if you buy and sell at the wrong time.

Key Takeaways

A trading strategy usually has three stages: planning, trade placement, and trade execution. Each stage of your strategy has metrics you should consider and change depending on market changes. Your trading strategy can depend on technicals (using statistical trends like price or volume movements), fundamentals (observing industry or economic conditions), or both. These analysis types use quantifiable information you can backtest to determine accuracy.

Selecting a Trading Strategy

Selecting a trading strategy doesn’t need to be complicated, and you don’t have to choose only one. Remember that the best traders can adapt and change their methods based on opportunities. Consider learning each trading strategy and combining different approaches to adapt to any situation.

The Top Types of Trading Strategies

There are several trading strategies you can use depending on your trading style. You can choose one method or combine two or more.

News Trading Strategy

This strategy involves relying on news and market expectations to determine trades. You can evaluate the news immediately after its release and decide whether to buy or sell the asset mentioned in the news.

News Trading Strategy Tips

Consider the following tips to help you trade on news updates:
    • Treat market and news announcements as individual entities.
    • Market reactions and expectations can also be as important as news releases, if not more.
  • Implement trading strategies for specific news releases.

Benefits of News Trading

  • Numerous trade opportunities: News events and economic releases can occur multiple times daily, providing trading opportunities.
  • A defined entry and exit strategy: Your decision to enter or exit trades depends on how you interpret the news.

Drawbacks of News Trading

  • Overnight risk: Suppose you leave a position open overnight, and a news announcement occurs that can reverse the trend. This overnight risk can affect any trade left open for the day.
  • Requires expert skills: Trading based on the news requires understanding how certain announcements can affect your positions and the financial market.

EOD Trading Strategy

This strategy involves trading near the end-of-day (EOD) or the market’s closing hours. If you’re an EOD trader, you become active when the price is about to settle or close. To use this strategy, you must study the asset’s price movements compared to the previous day. You can then speculate how the price will move and decide whether to buy or sell the asset from there.

Benefits of EOD Trading

  • Suitable for many traders: EOD trading can be an excellent way to start trading because you don’t need to enter multiple positions.
  • Less time commitment: You can assess charts and place market orders in the morning or at night. This way, you have significantly less time trading than other strategies.

Drawbacks of EOD Trading

  • Overnight risk: Like news trading, EOD trading can leave positions open overnight and incur more risks. Placing a stop-loss order can help mitigate this drawback.

Swing Trading Strategy

Swing trading refers to trading both sides of price movements in any financial market. If you’re a swing trader, you buy a security when you believe the market will rise and sell when you think the price will fall. Being a swing trader means taking advantage of the market’s back-and-forth price oscillations from an overbought to an oversold state. Swing trading is a technical approach to analysing markets because it involves studying charts and observing individual movements.

Swing Trading Strategy Tips

When you see strong trends, it’s possible to use retracement swings (minor price pullbacks or dips) to enter the trend’s direction. When there’s a new momentum high, consider looking into the highest probability trade and buying in the first pullback. If you encounter a new momentum low, you can also consider selling in the first rally.

Benefits of Swing Trading

  • Viable as a hobby: If you have a limited time, swing trading may better suit you than other trading strategies.
  • Provides many trade opportunities: This strategy lets you trade on both sides of the market, so you can go long and short across many securities.

Drawbacks of Swing Trading

  • Overnight risk: While you can hold some trades overnight, this method can incur additional risks. Placing stop-loss orders can help mitigate this disadvantage.
  • Ample research required: Plenty of research is needed to understand how to analyse markets, especially since technical analysis comprises various technical indicators and patterns.

Swing Trading Strategy Example

A trading strategy is a methodology that can help you make trading decisions. For swing trading, you can use the following methodology as an example:
  • Rule 1: If the market trades above the moving average, enter long positions (place buy trades) only.
If the price trades below the moving average, enter short positions (place sell orders) only.
  • Rule 2: Enter a long trade if the stochastic oscillator indicator is below 20, indicating oversold conditions.
Enter a short position if the oscillator is above 80 because this represents overbought conditions. A stochastic oscillator indicator compares a particular asset’s closing price to other prices over a specific period. You can use this indicator to generate overbought and oversold signals.

Day Trading Strategy

Intraday trading may best suit you if you prefer working during the daytime as a full-time profession. This strategy takes advantage of price fluctuations between the market’s opening and closing hours. With day trading, you can hold multiple positions open in a day. However, don’t leave them open until the next day because doing so may expose your trade to overnight risk. Consider following an organised trading plan to help you quickly adapt to fast market movements.

What Are the Benefits?

  • Time-flexible trading: You can enter several positions within the day and close them when you hit your objectives or stop-loss orders.
  • No overnight risk: Because you close your positions within the day, your trades aren’t exposed to overnight risk.
  • Limited risk: You open short-term trades that usually last around one to four hours, minimising the likelihood of high risks associated with long-term positions.
  • Multiple trade opportunities: You can trade in local and international markets and open and close positions within 24 hours.

What Are the Drawbacks?

  • Discipline required: Short-term trading styles usually entail a high amount of discipline and predetermined strategy involving specific entry and exit levels to help manage risk.
  • Flat trades: Some positions don’t move within a desired period, potentially leading to flat trades (no significant gain or loss) during the trading day.

Day Trading Charts and Patterns

Here are three analysis tools that can help you determine buying opportunities during day trading:
  • Candlestick chart patterns representing a market’s opening, high, low, and closing prices
  • Other technical analysis tools like trendlines and triangles to help identify the current direction of market prices
  • Trade volume

How to Create a Day Trading Strategy

Practise in real time what you are learning every day until you are comfortable using them in making trading decisions. You must understand and use day trading strategies until you master them. Whether you are day trading stocks or forex, the key elements to help you craft a day trading strategy include:
  • Markets to trade on: You can use day trading techniques on any major market like forex, stocks or ETFs (exchange-traded funds).
  • Timeframes to focus on: Day trading has multiple timeframes you can trade on. Familiarise yourself with how timeframes move and pick one that suits your availability.
  • Tools to help enter and exit trades: You can learn and use numerous trading indicators, test them using a demo account, and pick one or two to master for real-money trading.
  • Risk tolerance per trade: Risk management and trade sizing can help you avoid risking too much per trade. Risk management can also help mitigate back-to-back losses in your trading career.

How to Limit Losses When Day Trading

Ways to help limit your losses when your trades do not go as planned include the following:
Set Stop-Loss Orders
A stop-loss order is a mechanism designed to help limit losses on a position in a security. For long positions, you can place a stop-loss below a recent low. For short positions, the stop-loss can be above a recent high. Suppose a stock price moves at $0.05 a minute. You can place a stop-loss order $0.15 away from your entry price to give the asset enough space to fluctuate before trading in your desired direction.
Set a Financial Loss Limit
Consider setting a maximum loss per day that you can tolerate. Exit your position and take the rest of your day off whenever you hit this amount. You can resume your activity on the next trading day.
Test Your Strategy
After defining how you will enter trades and where to place your stop-loss orders, determine whether your preferred strategy fits your risk limits. If your strategy exposes you to more risk than you can handle, you can modify that strategy to lower the risk. Once your strategy provides a tolerable risk level, start testing, preferably using a demo account, by going through charts to find entry points matching yours. Also, note whether your strategy hits your price target or stop-loss orders.

Basic Day Trading Techniques

If you’re a beginner day trader, consider following these basic techniques:
  • Follow the trend: Anyone following the trend will likely buy when prices rise or sell when prices drop. The assumption is that prices that are steadily rising or falling will continue doing so.
  • Perform contrarian investing: In this strategy, you assume that increasing prices will reverse, so you expect trend changes and buy when the market drops or sell when prices rise.
  • Consider scalping techniques: This style involves exploiting small price gaps created by the spread (difference between the buy and sell prices). Scalping requires quickly entering and exiting a position, usually within minutes or seconds.

Day Trading Strategy Example

Suppose the trading indicator you use has a moving average covering the closing prices of the last 20 periods. When you create a day trading strategy, you can use this range to develop a trading rule. Here are a few examples:
  • Rule 1: Buy or enter a long position when the asset’s price moves above the moving average.
  • Rule 2: Sell or enter a short position when the asset’s price trades below the moving average.

Trend Trading Strategy

Having an accurate system to determine and follow trends can help you succeed in trend trading. Staying alert and adaptable to market conditions can also help, as trends can change instantly. If you’re into trend trading, you can use technical analysis to define a trend and enter trades based on that predetermined trend’s direction. However, market reversals can be a significant risk in trend trading. So, consider placing stop-loss orders to minimise those risks.

Trend Trading Strategy Tips

A few trend trading tips are as follows:
  • Stay alert for signs indicating a possible change or end to the trend. Movement during a trend’s last periods may accelerate as traders with losing positions start cutting their losses.
  • Determine the timeframe in which you want to follow the trend and keep your decision consistent.

Benefits of Trend Trading

  • Trend trading is a useful hobby: Trend trading may help you if you have a limited time after you create a system to identify trends.
  • Trend trading offers multiple trade opportunities: Trend trading provides opportunities to enter and exit a trade. Since trends can go up or down, trend trading allows you to trade both sides of the market.

Drawbacks of Trend Trading

  • Overnight risk: Trends can go on for several days, allowing you to leave your positions open for an extended period and exposing you to more overnight risk than other strategies.

Scalping Trading Strategy

A scalping strategy involves placing short-term trades with small price movements in the hope that the small profits from these trades will eventually accumulate. Scalpers should develop a disciplined exit strategy because a substantial loss can eliminate accumulated profits over time.

Benefits of Scalping

  • Suitable as a hobby: Scalping can be a flexible trading strategy ideal for people who want to trade in a relaxed manner.
  • No overnight risk: Most of your trades will last a few minutes only, so you don’t need to hold positions overnight.
  • Plenty of trading opportunities: You can open several small positions, giving you plenty of opportunities to trade.

Drawbacks of Scalping

  • Limited market applicability: Scalping works best in markets like indices, bonds, and some U.S. equities with high trading volume and volatility.
  • Requires discipline: Scalping generates small profits per trade, so you may need to buy and sell large position sizes to make your trades worthwhile. Having enough discipline can help manage the risks associated with trading large amounts.
  • Extremely tense environment: Monitoring small price movements for profit can be intense and may not suit some beginner traders.

Position Trading Strategy

In position trading, you typically hold a position for an extended period of time, such as months or years, and ignore minor price fluctuations to profit from long-term trends. If you’re a position trader, you will likely use fundamental analysis to analyse potential market price trends and historical patterns. Fundamental analysis is a valuation tool that helps you determine whether a stock is over- or undervalued by considering the company’s financial performance and the economic, industry, market, and sector conditions.

Benefits of Position Trading

  • Potentially high profits: Position trading allows you to utilise leverage to provide significant profit potential.
  • Less stress: You don’t need to check your positions daily, so there is less pressure with this strategy.

Drawbacks of Position Trading

  • Significant loss: Because you’re not observing market movements daily, you may ignore minor fluctuations that can become trend reversals, leading to substantial losses.
  • Swap: The swap is a commission you pay to your broker. Swaps can accumulate if your position is open for an extended period.

Positional Trading Strategy Example

You can develop a positional trading strategy using the following components:
  • A daily, weekly, or monthly chart
  • A trend filter, such as a 100-period moving average
  • A trend reversal momentum indicator for identifying momentum changes
Here are examples of rules for positional trading using the above components:
  • Rule 1: Enter a long position (buy) when the price trades above the moving average. Otherwise, go short (sell) when the market trades below the moving average.
  • Rule 2: Only enter a long trade if the MACD (moving average convergence/divergence) oscillator is above 0, meaning the momentum is turning bullish. Otherwise, go short if the MACD oscillator is below 0, meaning the momentum is turning bearish.

Top Trading Strategies by Asset Class

You can create and implement trading strategies based on your traded financial instrument. The following sections discuss these strategies.

Forex Trading Strategies

You can trade in the foreign exchange or forex market using almost all different types of strategy. The forex market is open 24 hours daily, five days a week, making forex among the most liquid markets for trading.

How to Choose the Best Forex Strategy

If you’re a beginner at forex trading, consider sticking to one or two simple strategies. Implementing too many technical indicators into your strategy may lead to information overload and conflicting signals. You can modify an existing strategy as you experience more trades. You can also use the experience from demo trading and backtesting (testing historical market data using a predictive model) to make adjustments.

EUR/USD Currency Trading Strategy Example

The currency market is open Monday to Friday, giving forex pairs like the EUR/USD (euro and U.S. dollar pair) a chance to trade in market conditions like uptrends, downtrends, and sideways market movements in a short period. In this case, consider using Bollinger bands in your EUR/USD trading strategy. As trend indicators, Bollinger bands help identify markets that often move sideways. Bollinger bands also detect market volatility. The Bollinger band tool consists of a middle line representing a 20-day simple moving average (SMA) used to calculate the upper and lower band values. These bands are typically two standard deviations away from the middle line. Because standard deviation measures volatility, many rules involving Bollinger bands focus on the upper and low band movements. Here are examples of those rules:
  • Rule 1: Wider bands suggest more volatility, meaning the market may start to trend.
  • Rule 2: Contracting bands may mean less volatility and may develop into a sideways trading market.

Stock Trading Strategies

Like forex, the stock market is excellent for utilising nearly all strategy types like swing trading, trend following, position trading, and a price action strategy. Fund managers and retail investors are likely to buy securities and hold them for the long term expecting a stock price appreciation, so trends often last longer in this market.

Position Trading Strategy Example

If you prefer position trading for stocks, consider using an exponential moving average (EMA) and look for a fast-moving average crossing above a slow-moving one and vice versa. For example, the 8-period EMA is the fast-moving average, and the 21-period EMA is slow-moving average. Hence, these rules apply:
  • Rule 1: Consider buying or going long if the 8 EMA (fast-moving) goes above the 21 EMA (slow-moving).
  • Rule 2: Sell or go short if the 8 EMA goes below the 21 EMA.

Commodity Trading Strategies

Gold, silver, and oil are among the widely traded commodities you can buy and sell as they can trend in a directional manner for some time. Commodity markets are heavily influenced by supply and demand issues due to geopolitical tensions, economic sentiment, and even weather patterns.

Commodity Strategy Example

The relative strength index (RSI) and MACD indicators can help you find trending markets, overbought and oversold conditions, and markets about to change direction. With these indicators, you can specify some rules for trading commodities. Here are rules to help process information when making trading decisions:
  • Rule 1: Go long (buy) when the MACD pushes above its zero line.
  • Rule 2: Go short (sell) when the MACD drops below its zero line.
The MACD can act as a trend filter to give you a directional preference. You can also use the RSI to look for hints of overbought and oversold conditions, as they may provide an idea of when you should execute a trade. You can apply these rules to use the RSI:
  • Rule 3: Go long when the RSI drops below 30, represented by a lower black line in the indicator window.
  • Rule 4: Go short when the RSI rises above 70, characterised by an upper black line.

Index Trading Strategies

Whether you’re a short- or long-term trader, index trading may help you identify strong trending conditions on lower and higher timeframes. Some strategies you can use for index trading are day trading, position trading, swing trading, hedging, and seasonal investing.

DAX40 Index Trading Strategy

The DAX (Deutscher Aktien Index or GER40) is a stock index representing 40 of the largest, most liquid German companies trading on the Frankfurt Exchange. While some traders focus on day trading stocks, many employ day trading techniques on stock market indexes due to low spreads and commissions. Some online brokers offer 24-hour CFD (contract for differences) trading on indices like the DAX40, consisting of blue chip stocks. By using a variety of trading indicators, you can identify market trends and a way to time your trades. Take the following rules as an example for trading in the DAX40 index:
  • Rule 1: Buy when the price pushes above the 50-day EMA, the MACD is above the zero line, and the price has rejected the lower Bollinger band line.
  • Rule 2: Sell when the price goes below the 50-day EMA, the MACD drops below the zero line, and the price has rejected the upper Bollinger band line.
Price rejection happens when buyers or sellers refuse to trade at a certain price level, resulting in a price movement in the opposite direction.

Other Strategies and Edges

Here are other trading strategies that may help improve your profitability and risk management based on your trading style.

Range Trading

Range trading allows you to take advantage of consolidating markets where the prices remain within the support and resistance levels. Support is where you can expect a downtrend to pause due to a demand concentration. Meanwhile, resistance is where you can expect an uptrend to pause temporarily because of a supply concentration. If you’re a scalper or short-term trader, you may consider range trading because it focuses on short-term profit-taking. You can also see this method across other trading styles and timeframes.

Breakout Trading

Breakout trading involves entering a trend as early as possible when the price breaks out of the resistance or support level. You can consider breakout trading if you’re a day trader or swing trader. This strategy looks into short- to medium-term market movements. In addition, this strategy is suitable for identifying price points indicating the start of a volatility period or market sentiment change. If you’re a breakout trader, consider placing a limit order near or along the support or resistance levels so that your trade executes automatically when a breakout occurs.

Reversal Trading

This strategy lets you identify when a current trend will change direction. Once the reversal occurs, this method becomes similar to a trend trading strategy. A reversal can go both ways because it’s a turning point in market sentiment. A bearish reversal is when the market’s uptrend shows signs of a downtrend. Meanwhile, a bullish reversal indicates that the market is at a low point of a downtrend and will likely change into an uptrend soon.

Gap Trading

A gap occurs when an asset has a sharp high or low price movement, indicating that the market has opened at a price different from the previous close. You can practise gap trading by monitoring these price gaps and seeking opportunities between the previous day’s close and the next day’s opening price range.

Pairs Trading

This trading involves finding a correlated pair of securities whose valuation relationship has gone out of sync, buying the underpriced asset, and selling the overpriced one. Your aim is to profit from the trade regardless of market conditions like uptrends and downtrends.

Arbitrage

Arbitrage is the execution of one or more transactions to generate profit without taking significant risks. Suppose you spot an opportunity in two equal assets where one has a higher price than the other. You can buy the lower-priced one while the asset is still undervalued.

Momentum Trading

A momentum trading strategy involves looking at price trends and their direction. Traders buy assets that show a significant price movement or volume change, increasing their chances of making a profit. Once the price changes, the momentum shifts to a different direction.

Algorithmic Trading Strategies

Algorithmic trading is trading using computer programmes to enter and exit positions. These programmes enable traders to code rules and conditions for the system to execute automatically. The algorithm functions as a scanner of potential markets based on your conditions. Once the programme finds a suitable market, you can analyse the chart and use your strategy to trade. You can also refer to algorithmic trading as automated trading, algo trading, black-box trading, or robot trading.

Seasonal Trading Strategies

In seasonal trading, you trade on the possibility of a trend repeating during certain weeks or months of the year. Some markets may exhibit seasonal characteristics due to predictable patterns in corporate events, government economic announcements, and even weather.

Long-Term Trading Strategies

Trading strategies usually allow you to execute short-term trades. However, if you prefer holding securities for the long term, investing strategies may help you hold such positions. Investing styles that you can use for long-term trading include:
  • Growth investing: This method identifies stocks with the best growth prospects. If you’re a growth-based investor, technology shares may appeal to you as these companies typically go public to raise capital.
  • Value investing: This method focuses on identifying stocks with the best value for money. Examples of value-based stocks are companies trading at a low price due to negative publicity or mismanagement.
Value investors look for changes in the company’s situation and invest in its growth prospects.

Price Action Trading

Price action trading focuses on making decisions according to a financial instrument’s price movements instead of using technical indicators. You can utilise various price action strategies like breakouts, reversals, and candlestick patterns. If you’re a beginner, having several indicators on your chart can send conflicting signals, leading to confusion. However, price action trading keeps your charts clean because you do not incorporate indicators. Also, with this strategy, you have less risk of encountering information overload.

News Trading

News trading may sound simple – you make decisions based on relevant economic information and data in the headlines. However, this strategy can also be risky because the market can become highly volatile during significant news events. Such volatility may lead to liquidity evaporation and slippage, a risk in which your trade executes at a significantly worse price than expected. Thus, it can be difficult for you to get out of your position at your preferred level.

Retracement Trading

You can use retracement, or at least a potential retracement, to buy securities when their price is low and sell when the price is high. Retracement trading involves looking at temporary changes in price movements to make trading decisions. Retracements are similar to reversals, except reversals indicate major trend changes, while retracements are temporary pullbacks.

Grid Trading

In grid trading, you place multiple orders above and below a specific price. This strategy aims to profit from volatility by putting buy and sell orders at regular intervals above and below a predetermined price level. Suppose the price moves in one direction, and your position and floating PnL (unrealised profit and loss) get larger. The downside is the possibility of a sudden reversal or false breakout.

Carry Trade Strategy

A carry trade involves borrowing a financial instrument with a low interest rate and using that to buy another financial instrument with a higher interest rate. You can use this strategy to profit from the difference in interest between two currencies making up a currency pair. The benefit of a carry trade strategy is that you can earn a substantial interest from just holding a position.

What Is the Best Trading Strategy?

By now, you may be asking which strategy is the best among the ones discussed in this article. The answer depends on numerous factors, like your preferred trading style, risk tolerance, and available capital. Also, the best strategy that works for you may differ from other traders.

What Is the Most Profitable Trading Strategy?

A profitable trading strategy can help you make money consistently over a reasonable period. The strategy you use must have a sizable gain and realistic winning rate to generate a net profit. For many traders, scalping is among the most well-known strategies and involves selling almost immediately after a trade becomes profitable. The price target is whatever figure you think will make the most money.

What Else Do You Need to Know?

Aside from trading strategies, knowing when and what securities to buy and sell can also affect your trading.

Deciding What and When to Buy

The following sections explain what you must know when deciding what and when to buy securities.

What to Buy

If you’re a day trader, consider looking at these three things when determining what asset to buy:
  • Liquidity: A highly liquid security means you can buy and sell it easily and at a reasonable price.
  • Volatility: More volatility means your chosen asset has greater potential for profit or loss.
  • Trading volume: Trading volume is the number of times traders buy and sell a stock in a given time. A high volume indicates plenty of interest in an asset and may lead to a price jump, either up or down.

When to Buy

Once you know the securities you want to trade, you must identify your trades’ entry points. Here are the tools that can help you decide when to buy:
  • Real-time news services: News can influence markets, so consider subscribing to services that alert you to these developments.
  • Electronic communication networks (ECNs): ECNs are computer-based systems providing the best available bid (buying price) and ask (selling price) quotes and automatically matching and executing orders.
  • Intraday candlestick charts: Candlesticks allow you to analyse price action that may help with day trading.

Deciding When to Sell

Some strategies you can consider when deciding to sell assets are:
  • Fading: Fading refers to selling stocks after rapid upward movements based on the expectation that:
    • The stock is overbought or not trading at its real value.
    • Early buyers are ready to sell and take profits.
    • Present buyers are wary of entering a position late.
  • Daily pivots: Pivots involve profiting from a stock’s daily volatility by buying at the day’s low and selling at the day’s high.
  • Momentum: You can capitalise on strong trends supported by high volume. You can buy based on news releases and ride a trend until you observe reversal signs.

Best Platform for Trading Strategies

Different traders may have different criteria for determining what trading platform is best for them. Consider choosing a platform with the appropriate tools and trading opportunities to meet your needs. Join EverythingTrading today and get unlimited access to trading strategy courses, webinars, ebooks, and the support you need to start your trading career for free. Want to test your trading strategies? Sign up for a demo account with a reputable trading broker and practise before trading with real money.

Steps to Getting Started on Our Platform

To sign up, visit EverythingTrading.com and create an account for free. You can then access free courses and ebooks once registered. You can also sign up for an ET+ account for $99 monthly and gain access to advanced trading courses, pro trading seminars, and live trading rooms. Once you’re ready to put what you learned into action, open an account with a regulated online broker to start trading.

FAQs

  • What strategies do professional traders use?

Although there are numerous strategies, professionals typically use momentum, trend, and mean reversion strategies when making trading decisions.
  • What makes day trading difficult?

Day trading can be challenging because you need plenty of knowledge and practice, especially when you’re a beginner. You’ll be trading against professionals who’ve built their careers around trading. You may become emotionally and psychologically affected, especially when you’re losing money on a trade.
  • Which trading strategy is the easiest for a beginner?

Following the trend is among the easiest trading strategies for a beginner due to the “the trend is your friend” concept. Based on this concept, you only need to follow the market’s general direction to determine whether you will buy or sell.
  • What are some short-term strategies?

Short-term strategies are those that involve buying and selling positions within several minutes or hours to a few days. Examples of such strategies include day trading, scalping, and range trading.
  • What is a long-term trading strategy?

Long-term trading involves buying securities and holding them for months or years. Investing in mutual funds is one example of a long-term trading strategy.
  • Is day trading good for beginners?

If you’re comfortable with a trading system that requires long working hours during the daytime and you have enough discipline to stick to your trading plan, you can give day trading a try.
  • Is fundamental analysis or technical analysis more appropriate for day trading?

Technical analysis can help you identify short-term trading trends and patterns essential for day trading. Meanwhile, fundamental analysis focuses on valuation and may be better for long-term trading.
  • Why is making money consistently from day trading difficult?

To make money consistently through day trading, you need to combine knowledge, discipline, experience, mental fortitude, and trading acumen. Even with these skills and attributes, success in day trading is not guaranteed. Day trading is a high-risk, high-reward endeavour, so make sure to commit to your financial goals.
  • Should a day trading position be held overnight?

Although day trading requires you to enter and exit trades within the day, you can still hold a trade position overnight. However, remember that doing so exposes your trade to overnight risk. Market news occurring after trading hours can influence prices the next day.
  • Am I a trader or an investor?

To answer this question, you should assess your trading preference and risk tolerance. If you enjoy short-term trading and have a higher tolerance for risk, you can consider trading. Meanwhile, investing may be your route if you prefer buying and holding positions for long periods.
  • Is trading for a living possible?

It’s possible to make money through trading, but remember that this activity comes with many risks and other costs. You may even have to make trading a full-time job if you want it to be your primary income source.
  • Which time frame is best for trading?

Traders usually work with a short time horizon, so shorter time frames spanning minutes or hours may be ideal. This way, you have a chance to generate and accumulate small gains over time.
  • Which market is best for trading?

The stock market may be one of the best places to start trading, especially when you have a diversified basket of stocks to help manage risks. You can choose from thousands of stocks in various industries, meaning you have more choices on what assets you want to invest. However, note that company earnings and other environmental factors like inflation may affect stock prices.
  • How do you compare forex strategies?

When comparing forex trading strategies, consider that some of them may best fit your style but may not work for other traders. As a beginner trader, you must identify your skills and tailor your trading strategy based on your personality, risk tolerance, and available resources.
  • How can you find out which FX trading strategy suits you?

Test your forex strategies using a demo account to determine what methods work for you. Even after testing what strategy works best, you don’t need to stick to one. Your preferences can vary, and you can change strategies, such as doing day trading at one point and then switching to scalping next.

References

  1. Stock exchanges – statistics & facts https://www.statista.com/topics/1009/global-stock-exchanges/
  2. What Is a Trading Strategy? How to Develop One https://www.investopedia.com/terms/t/trading-strategy.asp
  3. 10 Day Trading Tips for Beginners https://www.investopedia.com/articles/trading/06/daytradingretail.asp
  4. The Art of Selling a Losing Position https://www.investopedia.com/investing/selling-a-losing-stock/
  5. Stochastic Oscillator: What It Is, How It Works, How To Calculate https://www.investopedia.com/terms/s/stochasticoscillator.asp
  6. Fundamental Analysis: Principles, Types, and How to Use It https://www.investopedia.com/terms/f/fundamentalanalysis.asp
  7. Support and Resistance Basics https://www.investopedia.com/trading/support-and-resistance-basics/