Did you know that there are trading strategies that can help you learn about financial markets and greatly improve your trading results and make trading decisions?
In this guide, you will learn what a trading strategy is. You will also have the opportunity to explore various strategic techniques and examples of trading strategies. Trading strategy - definition.
A trading strategy is a course of action that a trader uses for all his transactions in the financial markets. For any investor, be it a beginner or a professional, it is important that any trading decision is sound and follows a strict plan.
When trading in the financial markets, the investor is responsible for making the decision to buy or sell an asset, or not to touch the underlying asset. The many tools available to traders make these decisions difficult and complex as they may involve many aspects of technical or fundamental analysis.
Trading strategies create a set of rules or methodologies that facilitate the process of making trading decisions.
Components of investment strategies.
In general, any trading strategy includes the following elements.
Trade type. There are many strategies suitable for scalping, day trading or swing trading. Timeframes: There are very effective trading methods for short-term trading, as well as strategies that work better in long-term trading. Traded Product: It is important that you choose a trading strategy that is tailored to the instrument you wish to trade, whether it be a currency pair, a stock market index, a commodity, or a stock. Profit management.
Since trading strategies are usually customized according to the needs of investors, they can also have other specific components:
the emergence of fundamental data (economic news) an overview and short-term picture of the market trend, specific trading indicators that can help in making a decision to buy or sell, etc.
The best markets to apply a trading strategy.
Before looking at some of the different types of strategies you can use, you may have already thought about which markets are best to trade. Since these trading methods are simply a sum of rules and conditions to help make a trading decision, they can be tailored to the specific market in question.
This is why many traders choose to use strategic methods in a wide variety of markets, including:
Forex, stock market, commodity exchange, crypto currency market
While there are various financial products that can be used to trade these markets, one of the most popular methods is CFD (i.e. Contracts for Difference) trading. Using this financial instrument, traders can speculate on rising and falling prices without owning the underlying asset. There are other benefits such as:
Leverage, Trading in any direction (buy/buy or sell/sell).
6 methods depending on trading style.
There are several tricks and methods for choosing the most suitable trading strategy. While the sheer number of these trading methods may seem daunting to beginners, the beauty of the financial markets lies precisely in the fact that there is usually something for everyone!
Depending on the timeframe they are trading, investors can choose between the following strategies:
Day trading strategies.
Day trading is a style in which traders buy and sell multiple financial assets in a single trading session, often closing their positions before the end of the day. In fact, it is very rare for active traders to hold positions overnight.
The most common time frames used in day trading strategies are four hours, one hour, thirty minutes and fifteen minutes.
How to create an intraday strategy?
Many traders use intraday stock trading, but this style of trading can be used in all financial markets. Since intraday traders place many orders throughout the day, it is important that they choose markets that offer them competitive spreads and low commissions. What time scale are you going to use? What trading indicators are you going to use? You will have many trading indicators at your disposal. Focus on one or at most two indicators that you fully understand. How much risk do you take on each trade? Trading and risk management systems are very important.
Having a day trading strategy is very important as the intraday trader is exposed to many random price movements that form many market conditions and trends (up, down and/or sideways price movements). Each of these situations requires different day trading methods.
Chart analysis trading indicators such as moving averages are popular with intraday traders because they can help differentiate changes in market conditions. When creating a day trading strategy, a trader can use the following rules to create a trading condition:
- Rule 1: When the price is above the moving average, only buy;
- Rule 2: When the price is below the moving average, only go short.
These two simple rules can help day traders simplify their decision making process.
However, the number of rules in an effective trading strategy can vary. In this example, the moving average helped implement the direction filter.
Swing trading strategies.
What is swing trading? Swing trading is a method by which traders buy and sell financial assets in order to hold them for several days, and in some cases even weeks.
Swing traders, also known as trend-followers, often use the daily chart to place trades that are broadly in line with the overall market trend.
Some swing trading strategies use only technical analysis in combination with a price chart to make trading decisions. However, swing trading methods usually use fundamental information or multiple analysis over different time frames as more detail is required to properly manage trades over multiple days.
One of the most popular swing trading methods is the use of trading indicators. There are several types of indicators on the market, and they all have both advantages and disadvantages. So what are the best indicators for swing trading?
Many swing traders use the stochastic oscillator, MACD, or Relative Strength Index (RSI) to be able to anticipate price action, whether it is a continuation of a trend or a possible trend reversal.
To create a trading condition, an investor can follow the following rules:
- Rule 1: When the price is above the moving average, you can place buy orders. When the price is below the moving average, it is recommended to place sell orders;
- Rule 2: Only place a buy order if the Stochastic Oscillator is below 20 as it represents an oversold zone. Place a sell order only if the Stochastic Oscillator is above 80 as it represents an overbought zone.
These simple rules can serve as a starting point, helping the trader to follow the trend and determine when to enter or exit the market. Of course, the relevant strategies will include additional rules for dealing with certain Japanese candlestick patterns, as well as support and resistance levels, stop loss or take profit orders, and more.
Position trading method.
Position trading is a style in which traders buy and sell assets with the idea of holding them for weeks or months. The position trader usually uses a combination of daily, weekly and monthly charts as well as some type of fundamental analysis in his trading decisions. In essence, a position trader is a less active investor; he is less concerned with short-term market fluctuations and at the same time tends to hold more long-term positions.
The primary focus of a position trader is on the risk/reward associated with a position. Typically for a position trader trying to maintain trades for weeks or months, such strategies often result in very small losses before a big profitable trade.
This allows the trader to initially risk small amounts on trades in order to increase the frequency of trades and diversify their portfolio.
Most position trading methods consist of three main components: Daily chart or on a longer time scale (weekly or monthly chart); trend filter;
Here are the rules a trader can follow:
- Rule 1: When the price is above the moving average, you just need to place a buy order. When the price is below the moving average, sell orders should be placed;
- Rule 2: Only place a buy order if the MACD oscillator is above 0 as this is a reversal moment. Place a sell order only if the MACD oscillator is below 0, as this is a tipping point for this trend.
In the chart above, the period when both rules are met is also the longest trend period. Of course, the trader must find the right time to place the order, and even if done correctly, the momentum can reverse in the opposite direction, resulting in a loss on the corresponding order.
However, these are long-term trend conditions that the position trader is trying to identify for purposes closely related to the trading activity.
Algorithmic trading is a method by which a trader uses computer programs to enter and exit the market. The trader codifies a set of rules and conditions for the operation of a computer program. Algorithmic trading is also known by various names such as: algorithmic trading, automatic trading, black box trading or robot trading.
Most algorithmic strategies aim to exploit very small price movements based on high trading frequency. Many novice traders are attracted to algorithmic strategies whereby they can enter and/or exit the market even if they are not connected to the market.
Although the number of algorithmic strategies that have failed is certainly greater than those that have always been successful, there are still a number of traders who manage to harness the power of algorithmic trading.
Essentially, the algorithm acts as a scanner of potential markets. The trader can then focus on analyzing the chart using their own strategy methods and trading techniques.
Seasonal trading implies the presence of a recurring annual trend. Many markets are often seasonal due to recurring situations such as weather patterns, government macro announcements and corporate earnings.
A seasonal trader can use these seasonal events as a kind of statistical indicator when choosing instruments with trading potential. As a result, even though seasonal trading is not a buy or sell system, it can still provide the trader with the bigger picture they need in the trading strategies and strategic methods they have chosen. There is an old saying in the world of market participants: “Sell in May and then you can leave!”. This pattern of trading activity is an expression of the typical seasonal weakness of the stock market during the summer months of May to October.
According to the Financial Analyst Journal in 2013, a study that tracked this phenomenon found that between 1998 and 2012, stock market returns were higher in November-April than in May-October. However, this does not necessarily mean that the summer months were generally negative.
However, there is another observation related to another popular seasonal strategy presented by the Santa Claus Rally. This refers to the trend of significant growth in stock markets over the last five trading days of the year and the first two days of the new year. It is important to remember that seasonal trading can only provide a marginal additional advantage over a basic trading strategy. The seasonal trader will also look at a number of other indicators and tools to determine which markets provide the most clarity and are not based solely on one analysis engine.
Investment strategies and trading strategies may have a lot in common, but they always have one significant difference. Investment strategies are designed for investors to hold long-term positions while trading methods are designed to manage multiple positions but in the short term.
Most investment strategies are designed as equity strategies because buying shares of profitable companies can theoretically have unlimited upside potential.
When shares are bought in a company, the potential losses are no longer unlimited. However, if the company goes bankrupt, this could mean that the investor will lose all of their original investment.
When investors formulate their own rules or conditions for their investment strategies, they usually try to replicate the values of exceptional companies like Amazon or Facebook. However, while this is not an easy task, there are many other companies that investors try to categorize according to certain investment styles, such as:
Investment in growth. These are strategies aimed at investing in the growth of the company and identifying the stocks of companies that present the best prospects for price growth.
Typically, this means identifying companies at an early stage in their business cycle. For example, technology sector stocks attract many capital-oriented investors, as such companies usually come to raise capital to further grow their business; Investing in value.
Value investing mechanisms and strategies aim to identify stocks that represent the most value relative to acquisition cost. Growth stocks are usually priced high because they offer the best prospects.
Value-based stocks usually go down because of negative news or bad management. Investors who prefer this category will look for changes in the company's situation and invest in the possibility of a change in trend.
Now that you are familiar with the six main types of strategies, we can look at the different methods of trading currencies, stocks, commodities, indices and CFDs. However, before you can learn and start applying some of them online, it is important to have the right trading platform so that you can access the best trading tools.