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A Sneak Peek at Popular Trading Strategies: Things You Need to Know From the Start
How do all those trading sharks make millions? Most of them would say that it’s all about using the right trading strategy. Find out what a trading strategy is, check out the most popular trading styles, and get some pro tips in this article.
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What is a trading strategy?
To put it simply, a trading strategy is a technique that allows traders to determine the right moment for buying or selling a particular currency or asset. It’s a fixed plan for making orders to achieve a certain return. Trading strategies are based on technical analysis and significant local or global news.
Trading strategies consist of the following components:
- Risk tolerance. This defines how much money a trader is willing to lose on a given investment. Risk tolerance is often dependent on the type of investment. Day traders usually opt for a lower level because they don’t have time to correct their strategy if something goes wrong. When it comes to long-term investments, traders can take action to save money when the market is volatile.
- Type of stocks. Depending on the assets selected, a trader should find the best combination of financial instruments and create a well-balanced portfolio.
- Technical analysis. It’s impossible to enjoy a steady profit by making decisions based on intuition and news only. Technical analysis uses indicators to help track market movements and/or trends to discover buy or sell signals.
Why use a trading strategy?
See these statistics? Although those 40% of newcomers know what trading is, they quit in the first month even before trying a strategy. Why so? The reason is simple: they are driven by emotions, not logic.
The factors behind a successful trading strategy are often underestimated. Meanwhile, having a plan and sticking to it involves:
- Taking into account multiple factors and having a wider picture of the market;
- Utilizing unbiased metrics, and not being driven by emotions;
- Having strict time frames and staying disciplined;
- Using a stop-loss: a price level at which a trader closes the position to avoid further losses;
- Properly assessing and managing risks.
Different types of trading strategies
Let’s look at some different types of trading strategies. They work over various timeframes, and some of them can be applied to particular markets only. Having a look at the pros and cons will help you figure out a suitable trading style.
End-of-day trading strategy
This means making deals near the close of markets when it becomes clear where the price is going to settle. Such an approach requires knowing the price action compared to the previous day’s fluctuations. End-of-day traders are guided by indicators and predictions of how the price will move based on its previous action. This strategy is less time-consuming because the user only needs to study charts and opening and closing times.
It’s suitable even for beginners. There’s no need to enter multiple positions, so newbies can get valuable experience without major losses.
Overnight risk. If something happens while the overnight position is opened, the asset price might not change as expected. A stop-loss can reduce risks.
It’s less time-consuming. Traders can open positions at night or in the morning: there’s no need to watch trades 24/7.
Here, traders are guided mostly by short- and medium-term market trends. They buy if the asset price is about to grow, and sell if it’s about to fall. They take advantage of market fluctuations, because cryptocurrencies (and securities) are often overbought or oversold. For successful swing trading, a person should understand what a trading chart is and how technical indicators work. Market analysis will help them interpret the duration and magnitude of each market swing.
It can be combined with a full-time job. For some, swing trading becomes a hobby because it’s not as time-consuming as other styles. However, it requires some research and understanding of technical indicators.
Overnight risk. Again, a stop-loss can mitigate this issue.
More opportunities. It allows trading both sides of the market and opening long and short positions.
It’s impossible without profound knowledge and research. The trader should always keep a finger on the pulse of the market.
Fibonacci lines indicate where support and resistance are likely to happen. Each level is associated with a percentage of how much the price retraced from the prior move. The indicator can be drawn between any two important price points (a high and a low). How is it measured? For example, if a coin reaches the $10 price and then drops by $3.67, the Fibonacci level will be 36.7%.
This approach allows users to capitalize on market movements by predicting a trend correction. Traders open positions before the trend resumes; in other words, they exploit its deviations. How exactly? They see events and publicly available information that causes the price to distort and call for a market correction.
Works in both market directions, uptrend or downtrend.
Can be risky and costly if no stop-loss is used.
It helps to understand more complicated trading strategies.
Requires experience and research. A person needs training to start distinguishing trends.
Suitable for any asset class.
Allows keeping many positions open.
This style requires a full-time commitment and a lot of attention. Day traders earn on price fluctuations in between the opening and closing hours. They keep deals open during the day and don't leave them overnight, which reduces risks. It’s imperative to follow a well-structured plan and quickly react to market fluctuations.
No overnight risk. The trader controls the situation and can quit at critical moments.
It demands discipline. A trader should follow a predetermined strategy while keeping in mind the entry and exit limits.
No long-term risks. Since day traders open short positions (1 to 4 hours), they don’t face immense fluctuations.
Flat trade. Some positions might stay at the same price level all day long.
Flexibility. With this approach, a trader decides on how many positions to create and what time of the day is the best for the activity.
Access to all markets. Some of them are even open 24/7.
This involves trading based on market expectations, i.e. before and after a news release. This style requires proactive reactions and a skilled mindset, because announcements spread like wildfire over digital media. A person employing this strategy should be able to get and process news immediately and make quick judgments. This style is perfect for volatile markets, especially cryptocurrencies.
Clear entry and exit thresholds. The decisions are based on how the market interprets the news, which can be foreseen in the trader’s plan.
Overnight risk. Some positions can stay open for several days. When left overnight, they might be impacted by information the trader misses.
Endless trading opportunities. Blockchain companies keep publishing tons of announcements every day, so there’s always a reason for market fluctuations.
It requires skills. Traders should clearly understand how certain information influences the market and assets.
Investors keep saying “The trend is your friend,” which is so true! But trend traders are well aware of more than “bullish” and “bearish”: they see deeper and can predict market movements more correctly.
How do they succeed?
- They keep tabs on news concerning the global and local economy, the companies behind assets, and influencers’ publications.
- They use trading charts and indicators.
- They set timeframes to watch the trend and instantly react to changes.
Less stress. Trend traders usually work with long-term positions, which means there’s enough time to think over the strategy in every single case.
It requires a lot of attention. While technical indicators can be accessed with a few clicks, reading and processing news takes time. Both should be properly analyzed to make forecasts.
Limitless trading. By processing a lot of information that concerns the entire market, traders can successfully predict changes for many assets.
This approach implies opening very short-term positions and operating with minor price fluctuations. Scalpers manage many positions to accumulate profits. This strategy requires setting a clear exit threshold, a lot of attention and special software. Scalping is recommended for experienced traders who can manage their emotions and are capable of multitasking.
No overnight risk. Time is not a scalper’s enemy.
A large number of trades involves more fees, which might be too high on some platforms.
Flexible schedule. Brief trades can be organized during the day.
Some stocks and assets are not volatile enough to make any substantial profit during the day.
Minimal research. Traders don’t have time to scan each indicator: instead, they’re driven by the current market.
This is the opposite case: traders look for massive price targets. That’s why their positions can stay open for months or even years. This approach works well for stocks and cryptocurrencies: as a rule, patience pays off. However, it’s important to set exit limits and check prices from time to time.
What is the difference between position trading vs. trend following? The latter might use trends for mid-term deals or even short-term trading. Position trading is rather about long-term investments. Plus, it involves more than finding trends: such an approach is based on the combination of technical analysis, fundamental analysis, macroeconomic factors, general market trends, and historical price patterns.
High profits. The return on investment can be much higher than expected. Plus, the risk of mistakes is minimal: there’s enough time to see a trend reversal.
The hidden danger of major trend reversals. A watchful trader can see them hiding behind minor price fluctuations.
Less stress. The trader doesn’t have to check positions several times a day.
Commission (swap). If a position stays open for a long time, the broker’s commission will accumulate and may even devour a large part of the profit.
What is the best trading strategy?
Any of the tactics described above can work well under particular market conditions. There is no one-size-fits-all option: pick a strategy based on your level of discipline, amount of investments, type of asset handled, risk tolerance, and even personal traits. As a rule, seasoned traders try many different strategies until they figure out what works best for them.
“There is no single market secret to discover, no single correct way to trade the markets. Those seeking the one true answer to the markets haven’t even gotten as far as asking the right question, let alone getting the right answer.” ~ Jack Schwager (author of Market Wizards)
If you’re a beginner and don’t want to search for a suitable trading approach at the cost of your capital, consider using a demo trading terminal with a virtual wallet.
Typical mistakes traders make
When it comes to trading, some risks are not worth taking. Your success depends on avoiding these common pitfalls:
- Stopping trading when you keep losing. A few unsuccessful deals are not a reason to give up. Even the best traders lose money on some of their trades. And at the beginning, your win rate might be low, but determination and practice make perfect.
- Not using a stop-loss. The best way to manage risks is to cut your losses before they grow too large. Without a particular limit, losses get exponentially higher. For each deal, there should be a stop-loss: that saves money and time. Instead of waiting for a market trend reversal, you can start a new trade.
- Trading with more than you can afford to lose. Play only with money you can live without. Otherwise, all your trading actions will be dictated by emotions, which is dangerous for trading. Here, patience is the key.
- Avoiding diversification. “Don’t put all your eggs in one basket” is the golden rule of trading. Don’t make multiple correlated trades: you risk losing everything.
- Making trading decisions solely based on others’ strategies. Following famous traders’ advice might be a tempting idea, but a good trader needs critical thinking. It’s crucial to find your own trading strategy, and set stop-losses and entry/exit points.
A trading strategy is a technique that helps you make a profit by opening and closing trade positions.
Absolutely, because they help you reduce risks and losses, predict market movements and increase your profits significantly.
There’s no correct answer. It should be chosen individually based on assets, budget, timeframes and personal traits.
Assess your strengths, try different trading styles, and figure out which approach works best for you.