Trading StrategiesTrading 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 StrategiesYou 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
- 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 TradingTrading 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 ConsiderationsTrading 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 PowerKnowledge 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 FundsWhen 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 TimeTrading 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 SmallIf 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 StocksPenny 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 TradesThe 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 OrdersLimit 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 ProfitsYour 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 CoolSometimes, 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 PlanSuccessful 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 CarefulWhether 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 DayJust 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 LeverageSome 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 Rise to Break Even
Avoid Obvious MistakesProfits 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 YourselfConsider 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 TakeawaysA 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 StrategySelecting 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 StrategiesThere are several trading strategies you can use depending on your trading style. You can choose one method or combine two or more.
News Trading StrategyThis 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 TipsConsider 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 StrategyThis 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 StrategySwing 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 TipsWhen 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 ExampleA 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.
- Rule 2: Enter a long trade if the stochastic oscillator indicator is below 20, indicating oversold conditions.
Day Trading StrategyIntraday 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 PatternsHere 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 StrategyPractise 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 TradingWays to help limit your losses when your trades do not go as planned include the following:
Set Stop-Loss OrdersA 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 LimitConsider 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 StrategyAfter 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 TechniquesIf 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 ExampleSuppose 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 StrategyHaving 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 TipsA 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 StrategyA 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 StrategyIn 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 ExampleYou 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
- 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 ClassYou can create and implement trading strategies based on your traded financial instrument. The following sections discuss these strategies.
Forex Trading StrategiesYou 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 StrategyIf 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 ExampleThe 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 StrategiesLike 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 ExampleIf 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 StrategiesGold, 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 ExampleThe 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.
- 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 StrategiesWhether 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 StrategyThe 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.
Other Strategies and EdgesHere are other trading strategies that may help improve your profitability and risk management based on your trading style.
Range TradingRange 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 TradingBreakout 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 TradingThis 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 TradingA 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 TradingThis 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.
ArbitrageArbitrage 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 TradingA 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 StrategiesAlgorithmic 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 StrategiesIn 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 StrategiesTrading 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.
Price Action TradingPrice 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 TradingNews 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 TradingYou 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 TradingIn 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 StrategyA 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 BuyThe following sections explain what you must know when deciding what and when to buy securities.
What to BuyIf 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 BuyOnce 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 SellSome 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 StrategiesDifferent 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 PlatformTo 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.
What strategies do professional traders use?
What makes day trading difficult?
Which trading strategy is the easiest for a beginner?
What are some short-term strategies?
What is a long-term trading strategy?
Is day trading good for beginners?
Is fundamental analysis or technical analysis more appropriate for day trading?
Why is making money consistently from day trading difficult?
Should a day trading position be held overnight?
Am I a trader or an investor?
Is trading for a living possible?
Which time frame is best for trading?
Which market is best for trading?
How do you compare forex strategies?
How can you find out which FX trading strategy suits you?
- Stock exchanges – statistics & facts https://www.statista.com/topics/1009/global-stock-exchanges/
- What Is a Trading Strategy? How to Develop One https://www.investopedia.com/terms/t/trading-strategy.asp
- 10 Day Trading Tips for Beginners https://www.investopedia.com/articles/trading/06/daytradingretail.asp
- The Art of Selling a Losing Position https://www.investopedia.com/investing/selling-a-losing-stock/
- Stochastic Oscillator: What It Is, How It Works, How To Calculate https://www.investopedia.com/terms/s/stochasticoscillator.asp
- Fundamental Analysis: Principles, Types, and How to Use It https://www.investopedia.com/terms/f/fundamentalanalysis.asp
- Support and Resistance Basics https://www.investopedia.com/trading/support-and-resistance-basics/