Experts reveal the 7 best trading strategies for beginners and their pros and cons
When you trade in the financial markets, whether it is forex, a stock index or a stock, you will come across several popular trading strategies. Experts in financial trading at CMC Markets revealed a guide to these trading strategies highlighting their pros and cons.
News Trading Strategy
A news trading strategy involves trading based on news and market expectations, both before and after news releases. Traders will need to evaluate news immediately after it is released and make quick judgments on how to trade it. Understanding these differences in market expectations is critical to success when using a news trading strategy.
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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.
- Many 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 broader financial market. Additionally, they need to understand the news from a market perspective and not just subjectively.
EOD business strategy
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:
- It is 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.
Swing trading strategy
The term “swing trading” refers to trading on both sides of 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.
- Many business opportunities. Swing trading involves trading “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.
Day trading strategy
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:
- There is no overnight risk. By definition, the strategy requires that no trade be left open overnight.
- Limited risk. A trader only opens short-term trades which usually last around 1-4 hours, which helps to minimize the likelihood of risks that may exist in longer-term trades.
Disadvantages of day trading:
- It takes rigor. Traders should use a predetermined strategy, with entry and exit levels, to help manage their risk.
- Apartment shops. This is when certain positions do not move within the time period, which is to be expected.
Trend Trading Strategy
This strategy describes when a trader uses technical analysis to set a trend and only enters trades in the direction of the predetermined trend. Trend traders don’t have a fixed view of where the market should go or in what direction. Success in trend trading can be defined by having a precise system for first determining and then following trends. However, it is crucial to remain vigilant and adapt as the trend can change quickly.
Advantages of trend trading:
- It is a useful pastime. Trend trading is suitable for people with little time after creating their trend identification system.
- Many 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.
Scalping trading strategy
Traders using 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 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:
- It is suitable as a hobby. Scalping is suitable for people who want to trade flexibly.
- Many 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.
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.
- Swap. 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 trading 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.