Trading strategies and styles for beginners
Despite the similarities in the concepts of strategies and trading styles, there is a significant difference between them. Both of them are a predetermined set of rules that a trader has developed to manage his trading. However, while a style involves the frequency of trading and the duration of holding positions open, a strategy involves determining the entry and exit points using which you enter and exit your trades. There are various methods for implementing a trading style or strategy, each of which has its own market environment and its own risks. Here are four of the most common trading styles and the risks of each.
Day trading
Day trading means that the trader will open and close all of his positions before the markets close each evening. Day traders do not allow transactions to remain open for more than 24 hours. So they will buy and sell multiple assets during the trading day, and sometimes multiple times a day, to take advantage of short-term market movements.
Day trading takes attention and dedication to the trading plan. It involves conducting a large number of transactions for a small profit compared to other styles. The volatility of the selected trading assets and the average daily quotation are two key factors that affect the trading performance of day traders.
However, this trading style can also lead to significant losses due to impulsive trading decisions. The reason is greed as well as lack of proper knowledge and skills.
Scalping
This fast and simple style includes technical analysis of the financial asset you want to trade. When you have decided on a clear direction for the price of an asset, you should open a position and close it in a few minutes. For example, when the price of an asset increases, scalpers can enter a buy position. Immediately after the price adjusting, they exit the transaction and enter the position to sell the asset. The buying and selling process continues many times until the scalper’s target is reached.
Thus, they generate a small profit from each transaction in a matter of minutes. The goal of the style is to make a profit on every small price movement. One of the advantages of a scalping style is that it limits your exposure to significant risks while entering and exiting a trade quickly.
Scalping also stands out from other trading styles as it does not require much factual knowledge of the asset being traded. The only thing you need for a clear understanding is the direction of the asset price. However, you should never open positions just before the release of important economic data. Markets tend to be extremely volatile when significant economic data is released.
Swing trading
Swing trading means entering a trade at the moment of a trend change, when there is usually some volatility in prices, as the new trend tries to strengthen. Swing trading is based on capturing one large movement in the market (one “swing” of the price). It means exiting a trade before the price goes back to adjustment. The average position retention period is about two weeks. But there are also situations when the stock grows in the trend direction for 4-6 months. It does not require you to spend all of your time in front of a monitor screen, but it does provide an opportunity to generate a consistent profit. To be successful in swing trading you require a combination of both technical and fundamental analysis.
Position trading
Position trading involves holding a trade for a long period of time (weeks, months, or even years). Position traders do not worry about short-term market fluctuations, instead, they focus on the overall market trend.
Traders look for a sequence of highs and lows at the price of a particular asset in order to determine the direction of its movement. Having caught the “wave”, traders tend to make money both on the rise and on the decline in prices. It is worth noting that they are not trying to predict price levels. As a rule, traders open a position after one or another trend has been established (for example, the stock price began to rise), and exit the position when the trend breaks.
Investing is perhaps the most popular form of positional trading. However, the investor will most often use a buy and hold strategy, while positional trading can refer to shorter positions as well. Position trading involves fewer trades than other trading styles, but positions will tend to have a higher value. However, the strategy both increases the profit potential and the trader’s exposure to risk.
Let’s consider the most popular trading strategies. It is important to recognize that strategies are based primarily on technical analysis, which requires detailed study and lots of practice.
Trend trading
Trend trading is not about predicting trends, but about joining the market movements that are already there. This strategy is best suited for those traders who use position trading or swing trading styles as positions remain open while the trend continues.The strategy is based on technical analysis using moving averages, RSI indicators as well as ADX indicators.
Consolidation trading
Consolidation is a balance between sellers and buyers, when either demand is equal to supply, or the majority of players in the market are absent. Consolidation trading is based on short-term price fluctuations. There is no sense to make deals during price consolidation as it moves in a very narrow price range. But consolidation can be used as powerful support and resistance levels. When the consolidation is completed, the price tends to move sharply up or down and this price feature is used to make a profit.
Breakout trading
This strategy is based on the fact that sooner or later the price breaks the level (if it breaks it downwards, then there is a break of the support level; if upwards, there is a break of the resistance level). The so-called false breakouts complicate breakout trading. A false breakout is a breakout after which the price will remain the same. It brings the main loss to traders who prefer this strategy.
Reversal Trading
The focus of the strategy is on determining when the current trend will change its direction. When a reversal happens, the strategy acquires the features of a trend trading strategy. Trend reversal (correction, rollback) is a temporary reversal of an established trading trend, when traders and investors decide to fix already profitable positions, because the activity of the initial movement has decreased significantly.
Macro-economic trading
Macroeconomic traders mainly focus on long-term country’s economy data. These traders can hold positions for months or even years. Some of the most important economic data that macroeconomic traders study includes the country’s GDP, the inflation and employment, interest rates and the trade balance. Based on this primary set of macroeconomic indicators, a trader can build a forecast for a particular country and its exchange rates.
Carry trade
Carry trade means to make a profit at the difference in the interest rates of assets. In practice, it consists of two stages: the purchase of a currency with a small interest rate and the acquisition of assets with increased profitability using these funds. For instance, you are a US citizen and take a loan at a local Bank at 3% and invest this credit money in Russian bonds at 6%. To use such a strategy, you need significant assets, because the profit is not so large.
The article covers the main trading styles and strategies. The path of each trader is special, so the choice of the style and strategy is based on knowledge, experience and the desired level of profit. In addition to actively used tools, there are also new trading trends. For example, artificial intelligence can help traders and investors manage their assets and invest efficiently. Such a web-service as MonInvAI predicts stocks and cryptocurrencies and can also be used for trading options and futures.
