What are the most common trading strategies – and do they work?
If there was a silver bullet that guaranteed business success, everyone would use it – and ultimately, the process would no longer be profitable!
One of the fun things about trading stocks, currencies, and other commodities is that you can develop your own strategy based on your unique ideas and interests in the market.
Suppose you are looking for something a little more “standard”. In this case, several common trading strategies are deployed generously by both casual and professional investors, and there’s nothing stopping you from following suit.
So, to help you on the path to improvement, here is a selection of trade strategies deployed today. Remember that passive trading strategies – what is called “buy and hold” – are perfectly acceptable. The options listed below are for those who want to get their hands dirty on a daily basis or at least regularly.
The most popular form of practical trading, the daily strategy, is, as the name suggests, taking a position in a market and looking to close it before the end of the day.
Available to all traders through their broker, day traders look for opportunities and then seek to maximize their return by using leverage to enter and exit the market in a timely and profitable manner.
Day traders should use a broker that offers low spreads that protect profits against ingestions and allow positions to be closed instantly. As an indication, here is a EToro UK Review to get you started.
Here is a trading strategy that offers the potential for high rewards for taking a lot of risk.
The idea here is to identify trends and patterns of an asset’s price movement that indicate an inward “swing”. You can buy if you think the swing will trend up and sell if you expect a downward movement on the horizon.
As you can probably guess, trying to catch a wave comes with some risk – if you’re wrong, you could end up at a disadvantage.
However, the rewards are clear: accurately predict a swing and you can maximize your returns from a relatively short time in the market.
Of course, to become a successful swing trader, you will need to understand technical analysis.
Exchange of positions
To some extent, position trading is like a longer term form of swing trading.
Again, you’ll be deploying technical analysis and chart reading to identify trends, but these will come through a larger lens of daily, weekly, or even monthly time frames.
The idea with position trading is to take a profit from a buy and hold tactic. However, there will be ongoing analysis of the charts to make sure your predictions are correct – this is not a passive investment in the truest sense.
Those with a low risk appetite might consider a scalping strategy.
This high volume approach seeks to enter the market, make a quick profit, and then exit as quickly as possible.
Of course, the market can still work against you when 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 very liquid with minimal spreads and where violent swings are almost nonexistent – think stocks like Apple or hard currency pairs such as USD / EUR.
Most scalpers use trading software to make sure they are closing their positions at the right time, usually with pre-defined profit / loss points in place.
The best tips for trading
While each of the above trading strategies requires unique skills, there are common concepts across all levels.
The first is to have a plan and plot – whether 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.
It is recommended to use software in your trading. Your broker should offer access to a package like MetaTrader, and the ability to automate your trades – which means you can take a step back – is vital.
With trading software, you can automate your position to take profit / loss at a predetermined time, and so if discipline is an area that you struggle with in your trading, then automation is an absolute must.
And you really need to do your homework. Learning to trade from a technical and fundamental perspective is not easy, but you will find that your profitability improves exponentially by taking the time to consume the necessary resources.