When trading in financial markets, you will encounter several popular trading strategies. You may also find that your success using one strategy will not mirror someone else’s success.
Ultimately, it’s up to you to decide which is the best trading strategy for you. Some important factors to consider include your personality type, lifestyle and available resources. In this article, we run through some of the most common trading strategies that could inspire you to build your own strategy, test new trading techniques or even improve upon your existing trading strategy.
A news trading strategy involves trading based on news and market expectations, both before and following news releases. Trading on news announcements can require a skilled mind-set as news can travel very quickly on digital media. Traders will need to assess the news immediately after it’s released and make a quick judgement on how to trade it. Some key considerations include:
Understanding these differences in market expectations is crucial to success when using a news trading strategy.
For more in-depth tips, read our article about trading news releases here, which covers various factors that are popular with regular traders.
When trading based on news releases, it’s vital that the trader is aware of how markets operate. Markets need energy to move and this comes from information flow such as news releases. Therefore, it’s common that news is already factored into the assets price. This results from traders attempting to predict the results of future news announcements and in turn, the market’s response. A news trading strategy is particularly useful for volatile markets, including when trading oil and other fluctuating commodities.
‘It's better to travel than to arrive’
The above is a common trading motto. This motto suggests that it can be better to trade on price action before an announcement rather than simply waiting for the announcement. Doing so may protect the trader from the volatility than can follow a rumoured announcement.
The end-of-day trading strategy involves trading near the close of markets. End-of-day traders become active when it becomes clear that the price is going to ‘settle’ or close.
This strategy requires the studying of price action in comparison to the previous day’s price movements. End-of-day traders can then speculate how the price could move based on the price action and decide on any indicators that they are using in their system. Traders should create a set of risk management orders including a limit-order, a stop-loss order and a take-profit order to reduce any overnight risk.
This style of trading requires less time commitment than other trading strategies. This is because there is only a need to study charts at their opening and closing times.
The term ‘swing trading’ refers to trading both sides on the movements of any financial market. Swing traders aim to ‘buy’ a security when they suspect that the market will rise. Otherwise, they can ‘sell’ an asset when they suspect that the price will fall. Swing traders take advantage of the market’s oscillations as the price swings back and forth, from an overbought to oversold state. Swing trading is purely a technical approach to analysing markets, achieved through studying charts and analysing the individual movements that comprise a bigger picture trend.
Successful swing trading relies on the interpretation of the length and duration of each swing, as these define important support and resistance levels. Additionally, swing traders will need to identify trends where the markets encounter increasing levels of supply or demand. Traders also consider if momentum is increasing or decreasing within each swing while monitoring trades.
Swing trading can offer a good risk-reward ratio if a plan is followed. However, swing traders need to be flexible and must be aware of when their strategy is not working effectively.
Day trading or intra-day trading is suitable for traders that would like to actively trade in the daytime, generally as a full time profession. Day traders take advantage of price fluctuations in-between the market open and close hours. Day traders often hold multiple positions open in a day, but do not leave positions open overnight in order to minimise the risk of overnight market volatility. It’s recommended that day traders follow an organised trading plan that can quickly adapt to fast market movements.
Just before the open of the FTSE and other European markets, traders should look to study the support and resistance levels and the possible reactions to the previous night’s trading in the US, as well as moves that have occurred in the Far Eastern markets. Many traders look to trade European markets in the first two hours when there is high liquidity. Otherwise, traders usually focus between 12pm – 5pm GMT when both the UK and US markets are open.
This strategy describes when a trader uses technical analysis to define a trend, and only enters trades in the direction of the pre-determined trend.
‘The trend is your friend’
The above is a famous trading motto and one of the most accurate in the markets. Following the trend is different from being ‘bullish or bearish’. Trend traders do not have a fixed view of where the market should go or in which direction. Success in trend trading can be defined by having an accurate system to firstly determine and then follow trends. However, it’s crucial to stay alert and adaptable as the trend can quickly change. Trend traders need to be aware of the risks of market reversals, those which can be mitigated with a trailing stop-loss order.
Several trend-following tools can be used for analysing specific markets including equities, treasuries, currencies and commodities. Trend traders will need to exercise their patience as ‘riding the trend’ can be difficult. However, with enough confidence in their trading system, the trend trader should be able to stay disciplined and follow their rules. However, it’s equally important to know when your system has stopped working. This usually occurs due to a fundamental market change, therefore it’s important to cut your losses short and let your profits run when trend trading.
Traders who use a scalping strategy place very short-term trades with small price movements. Scalpers aim to ‘scalp’ a small profit from each trade in the hope that all the small profits accumulate. As a scalper, you must have a disciplined exit strategy as a large loss can eliminate many other profits that have accumulated slow and steadily. Forex scalping is particularly common for trading currency pairs.
A scalper would operate away from the common mantra “let your profits run”, as scalpers tend to take their profits before the market has a chance to move. As scalpers generally operate on a risk/reward ratio of around 1/1, it’s common for scalpers not to make a large profit per trade, instead focusing on increasing their total number of smaller winning trades.
Position trading is a popular trading strategy where a trader holds a position for a long period of time, usually months or years, ignoring minor price fluctuations in favor of profiting from long-term trends.
Position traders tend to use fundamental analysis to evaluate potential price trends within the markets, but also take into considerations other factors such as market trends and historical patterns.
A good position trader knows how to successfully identify the right entry and exit points and knows when to place a stop-loss order.
When it comes to trading strategies, they can all perform well under specific market conditions; the best trading strategy is a subjective matter. However, it’s recommended to pick a trading strategy based on your personality type, level of discipline, available capital, risk tolerance and availability. You can practise any one of these trading strategies above on a demo trading account with a virtual wallet of £10,000.
Selecting a trading strategy doesn’t have to be complicated and you don’t have to stick with just one. A key thing to remember is that the best traders are adaptable and can change their trading strategy based on opportunities. Therefore, it’s a good idea to learn about each individual trading strategy and by combining different approaches to trading, you will become adaptive to each situation.
Nevertheless, remember not to become disheartened if you encounter initial losses on your capital. Patience is key when learning to become a successful trader, and mistakes and losses are inevitable in order to grow and develop your trading skills.
Successful traders often track their profits and losses, which helps to maintain their consistency and discipline across all trades. Consult our article on creating a trading strategy template that could help to improve your trade performance.
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