Trading Strategies

Creating a strategy for success entails study & preparation

Different Types of Investment Strategies

There are different kinds of strategies in trading and depending on the trader, finding the right ones that work for his or her trading style, risk tolerance, time horizon, and other factors can mean a world of difference in getting the best returns for their investment.

Of course, this doesn’t happen overnight, and there’s no one strategy that fits all types of traders. In fact, understanding trading strategies requires time, study, and preparation while knowing which ones work best requires experience and exposure to the market.

In general, trading strategies include three principal essentials:

  • WHEN to OPEN a trade
  • WHEN to CLOSE a trade
  • How to MANAGE your portfolio

These three trading pillars are important in maintaining a healthy lifespan for your trading account as they help mitigate your trading risks, help maximize your returns, and help prevent you from investing in trades that do not fall within your risk appetite.

Common Trading Strategies:

Price Action Trading:

This is a strategy that uses trends, charts, and other trading tools to study patterns or ‘signals’ in the price movements of an underlying market to help predict future market movements.

Range Trading Strategy:

This strategy uses technical indicators such as relative strength index (RSI) and involves identifying a range located between support and resistance levels and trading within that range.

Trend Trading Strategy:

Also known as trend following, this strategy involves going long when the trend goes up and entering a short position when the asset is trending lower. This is based on the expectation that a security will continue to move in the same direction as it is currently trending.

Carry Trade Strategy:

This strategy involves borrowing one currency with a low-interest rate and to invest the proceeds in another currency that offers a higher interest rate.

Position Trading

This is a long-term trading strategy where the trader holds a position for months or years, and ignore short-term price movements to wait for a big price move. This relies on fundamental analysis and long-term trends.

Short-term stock trading strategies

The following trading strategies apply primarily to day traders, since they are shorter in term.

Day Trading Strategy

This involves buying and selling within the same trading day so that all positions are closed before the market closes for the day. This is done to avoid overnight swaps, unmanageable risks and negative price gaps between one day’s close and the next day’s price at the open.

Forex Scalping Strategy

Scalping is the most common strategy of choice among day traders as it involves opening and closing extremely short-termed positions the moment they become profitable. This strategy attempts to make a profit out of small price movements within the forex market, with scalpers only holding the position for a period of a few seconds or minutes and repeating this process throughout the day to gain frequent returns.

Swing Trading Strategy

This strategy focuses on taking smaller gains in short-term trends, usually within a few days to a couple of weeks, and cutting losses quicker. While the gains might be smaller, repetitively and consistently doing so over time they can compound into impressive annual returns.

Advanced Trading Strategies

The Channel Strategy

In this strategy, traders employs technical indicators which highlight areas of support and resistance and use this information to determine whether they should open a buy or sell position. Traders trade using channels either by trading the trend or trading the breakout once the trend has completed.

Breakout Trading

This strategy looks for strong momentum and actual breakout as the signal to enter a position and take profit from the market movement that follows. Traders using this strategy aim to enter a trade as soon as the price manages to break out of its range. They will usually place the stop just below the former resistance level or above the former support level. To set their exit targets, traders may use classic support and resistance levels.

The Bullish/Bearish MACD Crossover

Both of these strategies use the MACD indicator in order to follow trends and gauge momentum. The crossover of the two lines gives trading signals similar to two moving average systems, whereby MACD crossing above zero is considered bullish while crossing below zero is bearish.

Bottom Fishing Strategy

Used in longer-term trends, this strategy works exceptionally well after pullbacks or major corrections. This strategy uses either technical or fundamental analytical techniques and involves investing in assets that have experienced a decline and are considered undervalued.

The Fractals Strategy

This strategy involves technical analysis using fractals to determine the direction in which the price of the asset will move and is being adopted by an increasing number of short-term traders. Fractals are indicators on candlestick charts that identify reversal points in the market.