There will always be various ideas about when to come or go from the market, how long an individual should hold a certain position, and how often we should trade. However, there are 5 major trading strategies that lie at the core of trading.
What do we understand by Trading Strategy?
A trading strategy refers to the technique of selling and buying in markets on the basis of predefined rules that are used to make decisions related to trading. It comprises a well-premeditated trading and investing plan, which specifies tax implications, time horizon, risk tolerance, and investing objectives.
Types of Trading Strategies
Your trading strategy may be unique to you. However, when it comes to their types, there are 5 major trading strategies that you can choose from. These are as follows:
1. Day Trading
Day trading is the most common active trading strategy. As its name suggests, this strategy is the process of selling and buying securities on the same day. The day the positions are taken is the same day they are closed. Additionally, there is no position that is held overnight.
Generally, day trading is done by professional traders, like market makers or specialists. Nonetheless, electronic trading has opened the practice to new traders.
Day trading is also known as short-term trading or intraday trading and is probably one of the most misunderstood trading approaches. The fast pace of fluctuating investment positions in a single trading day leads to a sense that day trading is more volatile and riskier than other types of trading approaches.
Day trading can be defined as an investment position that is entered and exited in a single day. The day trader opens and closes a position the same day; however, the positions can be held for a long (buying absolute) or short (borrowing shares and then selling at a certain price) period. While trading, a day trader is looking to benefit from market volatility during the trading day. On the other hand, the trader is also looking to evade the overnight risk as a result of certain events such as a bad earnings surprise, which might occur once the market is closed.
The risk involved in day trading strategies
As per the experts of the day trading market, the fact that trading positions are managed in a single day essentially makes it safer rather than riskier.
It is one of the best strategies, as traders don’t hold their trading positions overnight, avoiding the possibility of a surprise in an earnings report generated after the markets are closed, unfavourable economic news, or an overseas market. Although day trading is available for numerous securities, the day trading market is thin. That is, the position will open at a radically lower price (gap down) the following day after an undesirable overnight event.
Day trading strategies – the best time to trade
As a day trader, you need a volatile market with prices moving. The morning hours provide the best trading opportunities to the traders.
- Forex Market experiences best price movement at the London open, from 7 am to 10 am GMT
- Futures Trade experiences best price movement from 8:30 am to 11 am EST
- Stock Market experiences best price movement in its first two hours of the market open, from 9:30 am to 11:30 am[SM1] EST
Day Trading Strategies – tips to effectively start day trading
The following are the proven day trading strategies that can help you refine your day trading. Consider the tips if you want to develop more effective daily trading plans of action.
- Look for circumstances where demand and supply are severely unwarranted, and use these as your entry points.
- As a beginner, you should always set the price targets for day trading before jumping in.
- When placing your day trading targets, insist on a 3:1 risk-reward ratio.
- Patience is the key to active day trading.
- As a beginner, you need to be disciplined – avoid impulsive behaviour.
- Don’t be afraid to execute your trades.
- Never risk too much capital on one trade and only trade with money you can afford to lose.
- Explore the markets, don’t limit yourself to stocks.
- Learn from your mistakes.
2. Scalping or Scalp Trading
Scalping or scalp trading is a strategy that engages opening and holding of a position for a brief time, from a few seconds to a maximum of a few minutes. The main idea of the strategy is to open a trade and exit it the instant the market moves in your favour, getting small but recurrent profits.
Scalping or scalp trading is one of the most preferred strategies of professional traders. Unlike day trading, scalping is even shorter. That is, it is the shortest-term style of stock market trading since it tries to skim many small returns off large trade numbers during the trading day. Scalpers or scalp traders believe that it is easier to make a profit from small moves in stock prices rather than from significant moves. With that being said, there is no denying that it is one of the most challenging trading tactics to master, as it requires trading focus and unbelievable discipline. The primary reasons why traders are attracted to scalping include the following:
- A higher number of trading opportunities
- Since the profit targets are tiny, scalpers develop the ability to fight greed
- You can place up to a hundred trades or more each day
- Less exposure to risk
As a scalp trader, you can look to make money in a variety of ways. One of the most effective scalp trading strategies is to have a set profit target per trade. The profit target amount should be relative to the security price. When it comes to scalp trading strategies, another profitable tactic is to track stocks breaking out today trading lows or highs and utilising Level II to generate as much profit as possible. Although it is a profitable method, it requires flawless order execution and an enormous amount of concentration. One of the widely used scalp trading approaches that most scalpers use is to follow the current or upcoming events or news and trade that can cause increased volatility in a stock.
A scalp trader mostly makes decisions based on the following facets:
- Take 3-5 trades until the daily goal has been achieved
- As soon as you make a small profit, sell half of it, and adjust the exit to your entry point on the remaining market position. This ensures a high percentage of accuracy
- If there is no move up, immediately sell
- Buy at breakouts and see an immediate move up after entry
- Trade the hot stocks every day based on the watch list you create
On the other hand, expert scalp traders say that liquidity is a critical aspect of scalp trading given that they get in and out of their trades several times in a single day.
3. Swing Trading
The strategy that mainly aims at taking a position within a bigger move, swing trading involves holding the trade for several days or even weeks. This helps in taking advantage of short to medium term market movements.
The swing traders look for two kinds of market movements:
- Swing high: This is when the price goes up.
- Swing low: This is when the price goes down.
In swing trading, unlike day trading and scalp trading, the positions are held for longer than a single day. Swing trading can be used to trade in cryptocurrency, ETFs, options, stocks, futures, and forex. The traders seek to capture profits by holding an asset for any length of time from overnight to a few weeks. The primary objective of swing trading is to take advantage of a more significant price shift than is possible in a day trading timeframe. Since you are following a more substantial time shift and price range, the odds of the downside risk is higher. Hence, you need calculated position sizing.
In order to obtain a calculated position sizing, traders turn to technical analysis for determining instruments with short-term price momentum. This emphasises the need for following the principles and fundamentals of trends and price action. Swing trading involves commission costs and specific risks that are higher than and different to the typical investment trading tactics.
The swing traders work with the chart’s primary trend. In cases where the security is an uptrend, the trader will ‘go long’ on that security by buying futures contracts, call options, or shares. However, if the overall trend is down, the trader may consider buying out options or could short futures contracts or shares.[SM2]
The best swing trading strategies
Unlike other trading strategies where traders target 20%–25% profits for most of their stocks, the profit goal in swing trading is a more modest 5%–10%.
The average length of the gain is around 5–10 days, and an expert swing trader’s focus isn’t on profits developing over days or even months. Going with the short-range allows you to make a lot of small wins that ultimately add up to the significant overall returns.
5%–10% gains over a week can add up to significant profits that are equal to a 20% gain over a month.
Obviously, you still have to factor in losses. However, if losses are kept small, smaller gains will produce growth in your portfolio. Further, effective swing trading approaches can deliver more substantial profits on individual trades. But the first key to effective swing trading is choosing the right assets. The best candidates include large-cap stocks that are the most actively traded stocks on the major exchanges.
Finally, swing trading procedures involve taking trades that last a few days to several months to attain profit from an anticipated price move. Moreover, you can earn profits by exploiting the established risk/reward ratio depending on the profit target and stop-loss, or you can take losses or profits based on a price action movement or technical indicator.
4. Position Trading
In position trading, the trader holds a trade for a long period, which may extend to weeks, months and even years. Position traders are least concerned about the short-term fluctuations in the market. Rather, they are focused on the overarching trend of the market.
The most well-known form of position trading is an investment. Nonetheless, an investor would usually deploy a buy and hold strategy, while position trading can also refer to short positions, like selling an asset.
Position trading is excellent for those who want to take up long-term positions on assets such as stocks, futures, options, and other assets. However, taking up long-term positions while having a higher perspective for profits also increases the inherent risk.
As a position trader, you will be less concerned about the short-term market fluctuations as you will be keeping a position open for a long duration. It can be anything from weeks, months, or even years. Investing is the most common kind of position trading; hence, it can refer to speculating on the price. Most position traders have long-term investments in pension plans, funds, and share portfolios.
Often, traders use technical analysis and fundamental analysis for evaluating the potential market risks and trends before opening a position.
Position trading strategies – analysing price charts and making predictions about market movements
Resistance and support trading strategies help traders determine when a stock’s price movement is likely to increase into an upward trend or decrease into a downward trend. Based on resistance and support levels, position traders can choose whether to close or open their position on a specific asset.
The resistance level is a point at which the asset’s price ceases to increase, whereas the support level is a point at which the asset’s price will not usually fall below.
Breakout trading tactics, on the other hand, involve occupying a position in the early stages of a trend. In general, a breakout strategy formulates a foundation for the position traders for trading extensive price movements. That is, a position trader, considering the asset price breaks above the resistance level, will open an extended position. Conversely, the position trader will enter a short position after seeing the asset price falling below the support level. Hence, to properly implement these trading tactics, you need to be comfortable determining periods of market resistance and support.
Another influential position trading strategy that works best when the market is constantly shifting up and down is the range trading strategy. This is one of the methods that enables traders to sell overbought assets and buy oversold ones.
5. Reversal Trading
Also known as mean reversion strategy, pullback trading, and trend trading, reversal trading can be dangerous to beginners. The strategy, used all over the world, challenges the basic logic as a trader aims to trade against the trend. He needs to be able to accurately predict the pullback’s strength and identify possible pullbacks.
Your final profits are largely based on the strategies you use. Therefore, it is noteworthy that, usually, the straightforward strategies prove to be successful.
Reversal trading simply means “don’t trade against the trend”. If done the right way, reversal trading can be dramatically profitable. All you need to do is identify high profitability trend reversal areas. This allows you to market bottoms and tops with heightened accuracy. Put simply, a market reversal is a turning of a price trend, marked by a subsequent directional and definitive low or high move against set price action.
When we talk about the reversal in a bullish market, it is the decrease of price from a downright high formed by an uptrend. On the other hand, the reversal in a bearish market consists of an increase in price from downright low established by a downtrend.
When implementing trading strategies based upon market reversal, you are advised to consider the following aspects of the trade:
- A product’s traded volume and the market’s liquidity are the significant considerations
- For entering a position alongside a trending market, elements of reversals like technical and external news releases, a convergence of market fundamentals etc. must be present
- Adherence to reward expectations and definite risk are a critical part of the accounting
These are the top 5 most powerful trading strategies of the best performing professionals. If you are considering trading, you are advised to have a thorough check of the mentioned strategies. This will help you determine which is best and what you can implement to make the most out of it. If you have any queries regarding the trading strategies that we have mentioned, feel free to ask us. We are happy to help you!