Seven Trading Strategies Every Trader Should Know

CMC Markets, one of the world’s leading online trading providers, outlines seven key trading strategies traders need to know.

When trading the financial markets – whether in currencies, stock indices or individual stocks – traders will come across several popular strategies. The following is our guide to CMC Markets to these trading strategies, where we highlight their advantages and disadvantages.

1. News Trading

A news trading strategy involves trading based on news and market expectations, both before and after news releases. Traders need to evaluate news immediately after it is released and make quick judgments on how to trade. Understanding these differences in market expectations is critical to success when using a news trading strategy.

Benefits of news trading:

  • The ability to define an entry and exit strategy. The entry and exit of a trade is based on how the market and the individual trader interprets the news, which is usually outlined in a trader’s plan.
  • Multiple business opportunities. Every day there are several news events and economic releases that can provide trading opportunities.

Disadvantages of news trading:

  • Night risk. Depending on the type of news, trading positions can be opened for several days. Any positions left open overnight incur overnight risk, such as news impacting the stock price.

News trading requires expert skills. News traders need to understand how certain announcements will affect their positions and the wider financial market. Additionally, they need to understand the news from a market perspective and not just subjectively.

2. EOD Trade

The end-of-day (EOD) trading strategy involves trading near the market close. EOD traders become active when it seems likely that price will “break down” or close.

This strategy requires the study of the price action in relation to the price movements of the previous day. EOD traders can then speculate on how the price might move based on the price action and decide what indicators they use in their system.

Advantages of EOD trading:

  • Suitable for most traders. EOD trading can be a good way to start trading, as there is no need to enter multiple positions.
  • Less time commitment. Traders can analyze charts and place market orders in the morning or evening, which can take much less time compared to other strategies.

Disadvantages of EOD trading:

  • Night risk. Overnight positions can carry more risk, but this can be mitigated if you place a stop loss order. Guaranteed stop-losses are even more helpful in mitigating risk

3.Swing trading

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 the market will rise. Alternatively, they may “sell” an asset when they suspect the price will go down. Swing traders profit from swings in the market when the price swings back and forth from an overbought state to an oversold state.

Advantages of swing trading:

  • It’s viable as a hobby. Swing trading may be more suitable for people with limited time compared to other trading strategies. However, this requires research to understand how oscillation patterns work.
  • Multiple business opportunities. Swing trading involves trading on both sides of the market, so traders can go long and short on a number of securities.

Disadvantages of swing trading:

  • Night risk. Some trades will take place overnight, bringing additional risk, but this can be mitigated by placing a stop-loss order on your positions.
  • Requires a lot of research. A lot of research is needed to understand how to analyze the markets, as technical analysis includes a wide variety of technical indicators and patterns.

4. Day trading

Intraday trading is suitable for traders who want to trade actively during the day, usually as a full-time profession. They take advantage of price fluctuations between market opening and closing hours, often holding multiple positions, but do not leave positions open overnight to minimize the risk of overnight market volatility. It is recommended that these types of traders follow an organized trading plan that can adapt quickly to rapid market movements.

Advantages of day trading:

  • No overnight risk. The strategy requires that no trade be left open overnight.
  • Limited risk. A trader only opens short-term trades which usually last around one to four hours, which helps to minimize the likelihood of risks that may exist in longer-term trades.

Disadvantages of day trading:

  • Requires discipline. Traders should use a predetermined strategy, with entry and exit levels, to help manage risk.
  • Apartment shops. This is when certain positions do not move within the time period, which is to be expected.

5. Trend Trading Strategy

This is the use of technical analysis to set a trend, and only entering trades in the direction of a predetermined trend. Trend traders don’t have a set view of where the market should go, or in which direction. Success in trend trading can be defined by having an accurate system for determining and following trends. However, it is crucial to remain vigilant and adapt as the trend can change quickly.

Advantages of trend trading:

  • Good for the hobbyist. Trend trading is suitable for people with little time after creating their trend identification system.
  • Multiple business opportunities. A dominant trend can provide various opportunities to enter and exit a trade.

Disadvantages of trend trading:

  • Night risk. Trend trades are often open over several days, so they may incur more overnight risk than other strategies.

6. Scalping the trading strategy

A scalping strategy places 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 need to have a disciplined exit strategy because one big loss can wipe out many other profits that have built up slowly and steadily.

Advantages of scalping:

  • Good for the hobbyist. Scalping is suitable for people who want to trade flexibly.
  • Multiple business opportunities. Scalpers open several small positions with a less defined criteria compared to other strategies, so there are plenty of opportunities to trade.

Disadvantages of scalping:

  • Limited commercial applicability. Scalping only works on particular markets such as indices, bonds, and some US stocks. Scalping requires very high volatility and trading volumes to be worthwhile.
  • Requires discipline. As scalping requires larger positions than other trading styles, traders must be extremely disciplined.

seven. Position trading strategy

Position trading is a popular trading strategy in which a trader holds a position for a long period of time, usually months or years, ignoring minor price fluctuations in favor of long-term trends. Position traders tend to use fundamental analysis to assess potential price trends in the markets, but also consider other factors such as market trends and historical patterns.

Advantages of position trading:

  • High profit potential. Position trading allows traders to use high leverage because the possibility of an error is lower than in conventional trading.
  • Less stress. One of the biggest advantages of position trading is that positions do not need to be checked daily.

Disadvantages of position trading:

  • Potential for significant loss. Position traders tend to ignore minor swings that can become full trend reversals and lead to big losses.
  • The swap is a commission paid to the broker. If the position is open for a long time, swaps can accumulate a large amount.

What is the best business strategy?

When it comes to trading strategies, they can all work well in specific market conditions; the best trading strategy is a subjective matter. However, it is recommended that you choose a trading strategy based on your personality type, level of discipline, available capital, risk tolerance and time availability.

Spread bets and CFDs are complex instruments and come with a high risk of losing money quickly due to leverage. The vast majority of retail client accounts lose money when betting on spreads and/or trading CFDs. You need to ask yourself if you understand how spread betting and CFDs work and if you can afford to take the high risk of losing your money.

CMC Markets is a UK-based financial services company that offers online trading of stocks, spread betting, contracts for difference and foreign exchange on global markets. CMC is headquartered in London, with hubs in Sydney and Singapore.

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