Modules for Traders
Trading Strategies 2
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Things to Know About Other Trading Strategies
What is the best trading strategy?
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.
Other Trading Strategies:
1. Scalping trading strategy
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 slowly and steadily.
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.
Benefits of scalping
- There is no overnight risk. Scalpers do not hold overnight positions and most trades only last for a few minutes at maximum.
- It’s suitable as a hobby. Scalping is suitable for people who want to trade flexibly.
- Many trading opportunities. Scalpers open several small positions with a less defined criterion in comparison to other strategies, therefore there are a lot of opportunities to trade on.
Drawbacks of scalping
- Limited market applicability. Scalping only works in particular markets such as cryptocurrencies, indices, bonds etc. Scalping requires very high volatility and trading volumes to be worthwhile.
- Requires discipline. As scalping requires larger position sizes than other trading styles, traders need to be extremely disciplined.
- It’s an extremely tense environment. Monitoring the slightest price movements in search of profits can be an extremely intense activity. It’s therefore not recommended for beginner traders.
2. Trend Trading Strategy
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.
Trend trading strategy tips
- Stay alert for signs that the trend is ending or is about to change. Also, keep in mind that the last part of a trend can accelerate as traders with the wrong positions look to cut their losses.
- Decide the timeframe in which to follow the trend and try to keep this consistent.
Benefits of trend trading
- It’s a useful hobby. Trend trading is suitable for people with limited time, after their trend identification system has been created.
- Many trade opportunities. A prevailing trend may offer various opportunities to enter and exit a trade. Additionally, trend trading may involve playing ‘both sides’ of the market.
Drawbacks of trend trading
- Overnight risk. Trend trades are often open over several days so they may incur more overnight risks than other strategies. However, this can be mitigated by placing stop-loss orders.
3. Day trading strategy
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.
Benefits of day trading
- There is no overnight risk. By definition, intra-day trading requires no trade to be left open overnight.
- Limited intraday risk. A day trader only opens short-term trades that usually last around 1 to 4 hours, which minimises the likelihood of risks that may exist in longer-term trades.
- Time flexible trading. Day trading might suit people who desire flexibility with their trading. A day trader might enter 1 to 5 positions during the day and close all of them when objectives are hit or when they are stopped out.
- Multiple trade opportunities. A day trader can make use of local and international markets and can open and close many positions within the day.
Drawbacks of day trading
- It requires discipline. Similar to other short-term styles, intra-day trading requires discipline. Traders should utilise a predetermined strategy, complete with entry and exit levels, to manage their risk.
- Flat trades. This is when some positions do not move within the day, which is to be expected.
4. Swing trading strategy
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.
Benefits of swing trading
- It’s viable as a hobby. Swing trading can be more suitable for people with limited time in comparison to other trading strategies. However, it does require some research to understand how oscillation patterns work.
- Many trade opportunities. Swing trading involves trading ‘both sides’ of the market, so traders can go long and short across a number of securities.
Drawbacks of swing trading
- Overnight risk. Some trades will be held overnight, incurring additional risks, but this can be mitigated by placing a stop-loss order on your positions.
- It requires ample research. A lot of research is required to understand how to analyse markets, as technical analysis comprises a wide variety of technical indicators and patterns.
Now that we understand the nitty gritties of trading strategies, let’s learn the practical of Backtesting strategies in the next chapter.
A quick recap
- Scalpers aim to ‘scalp’ a small profit from each trade in the hope that all the small profits accumulate.
- Trend traders do not have a fixed view of where the market should go or in which direction.
- Day traders take advantage of price fluctuations in-between the market open and close hours.
- The term ‘swing trading’ refers to trading both sides on the movements of any financial market.