Expert Opinion: The Best Trading Strategies for the New Financier
The Tokyo Stock Exchange was among the losers at the start of the session on Tuesday – Copyright AFP Behrouz MEHRI
When you trade in the financial markets, whether exchange (forex), stock index or stock, the new investor will encounter several popular trading strategies. For advice for those entering the arena for the first time, Digital diary met experts in financial trading at CMC Markets. The assessment includes pros and cons; risks and opportunities.
This connection reveals a guide for those business strategies highlighting their advantages and disadvantages.
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.
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.
Disadvantages of news trading
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 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.
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.
EOD trading can be a good way to start trading, as there is no need to enter multiple positions. Traders can analyze charts and place market orders in the morning or evening, which can take much less time compared to other strategies.
However, overnight positions can come with 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.
Swing trading may be more suitable for people with limited time compared to other trading strategies. Nevertheless, it requires research to understand how oscillation patterns work. Swing trading involves trading “both sides” of the market, so traders can go long and short on a number of securities.
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.
With this approach, there is no overnight risk. By definition, the strategy requires that no trade be left open overnight. Yet, to be successful, traders must use a predetermined strategy, complete with entry and exit levels, to help manage their risk.
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.
Trend trading is suitable for people with little time after creating their trend identification system. However, 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.
Scalping is suitable for people who want to trade flexibly. Scalping only works on particular markets such as indices, bonds and certain stocks.
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.
Position trading allows traders to use high leverage because the possibility of an error is lower than in conventional trading. Position traders tend to ignore minor swings that can become full trend reversals and lead to big losses.
When it comes to trading strategies, Digital Journal warns that they can all work well in specific market conditions. An important point based on the above is that the best trading strategy is a subjective matter.