What are the most common trading strategies – and do they work?
If there were a silver bullet that guaranteed trading success, everybody would use it – and then, ultimately, the process would not be profitable anymore!
One of the fun things about trading stocks, forex, and other commodities is that you can develop your own strategy based upon your unique ideas and interests in the market.
Suppose you seek something a little more ‘off the shelf.’ In that case, several common trading strategies are deployed liberally by casual and professional investors alike, and nothing is stopping you from following suit.
So, to help you on the road to improvement, here’s a selection of the most widely-used trading strategies being deployed today. Remember, passive trading strategies – the so-called ‘buy and hold’ – are perfectly acceptable. The options listed below are for those who want to get their hands dirty on a daily or at least a regular basis.
The most popular form of hands-on trading, the day-based strategy, is, as the name implies – taking a position in a market and looking to close it before the day’s end.
Available to all traders via their broker, day traders look for opportunities and then seek to maximize their return by utilizing leverage to get in and out of the market in a timely and profitable fashion.
Day traders must use a broker that offers low spreads that protect profit from being eaten into and delivers instant closing of positions. As a guide, here’s an eToro review UK to get you started.
Here’s a trading strategy that offers the potential of high rewards for taking on plenty of risk.
The idea here is to identify trends and patterns in an asset’s price movement that indicates an incoming ‘swing.’ You can buy in if you believe the swing will trend upwards and sell if you foresee a downward movement on the horizon.
As you can probably guess, there are risks implied in trying to catch a wave – get it wrong, and you could be left in a disadvantageous position.
However, the rewards are clear to see – accurately forecast a swing, and you can maximize your returns from a relatively short time in the market.
Naturally, to become a successful swing trader, you will need to understand technical analysis.
To some extent, position trading is like a longer-term form of swing trading.
Again, you’ll deploy technical analysis and chart reading to identify trends, but these are through a wider lens of daily, weekly, or even monthly timeframes.
The idea with position trading is to cash a profit from a buy-and-hold tactic. However, there will be continuous analysis of the charts to ensure your forecasting is correct – this is not passive investing in the truest sense of the term.
Those with a lower appetite for risk might want to consider a scalping strategy.
This high-volume approach looks to get into the market, net a quick profit, and then exit as fast as possible.
Of course, the market can still move against you in scalping, but the idea is that if you close your position at the right time, your loss will be minimized.
The best markets for scalping are highly liquid with minimal spreads and where violent swings are almost non-existent – think stocks like Apple or strong forex pairs such as USD/EUR.
Most scalpers utilize trading software to ensure they close their positions at the right time, typically with pre-set profit/loss points in place.
Top tips for trading
While each of the trading strategies above requires unique skills, there are some common concepts across the board.
The first is to have a plan and to plot out – either in your mind or even on a spreadsheet – the prices at which you want to exit the market. Even position traders will have a rough estimate of when to close out.
It is recommended that you use software in your trading. Your broker should offer access to a package such as MetaTrader, and the ability to automate your trades – meaning that you can take a back seat – is vital.
With trading software, you can automate your position to take profit/loss at a pre-determined point, and so if discipline is an area you struggle with in your trading, then automation is an absolute must.
And you really must do your homework. Learning how to trade from a technical and fundamental standpoint is not easy, but you will find that your profitability improves exponentially by taking time to consume the necessary resources.