Are you overwhelmed by the sheer number of trading strategies out there? Don’t know whether to day trade, swing trade, or go for a longer-term strategy?
You have to find the strategy that works for you. It could mean the difference between success and failure.
But where to start? How to choose?
To help you find your fit, start with this list of trading strategies. You’ll also get some scanning tips and tricks to help you figure out what can work for you.
What Are Trading Strategies?
Before we dive into the nitty-gritty, let’s detail what exactly a trading strategy is. A trading strategy is a well-thought-out plan for making trading decisions. A good trading strategy includes rules for you to follow when you trade, such as:
- What all you need to evaluate before you enter a trade?
- When and where you’ll exit your position, and how much you’ll risk in a trade?
- Where you’ll place your stop loss, to safeguard yourself from unexpected market movements?
Trading strategies can come in a variety of shapes, sizes, and colors. Some are so insanely simple a six-year-old could follow them. Other strategies are mired in complexity. These may require cutting-edge computing and a team of PhDs. You can choose (or build) a group of strategies that work best for you personally.
Why do you need to build your trading strategy?
The ultimate aim for any investor or trader is to achieve consistent profitability in the markets. A trading plan is a guide that ensures you will stay on track on your journey to your desired destination. Also read our previous post on Traits of a Successful Trader for more insights.
It does so by:
- Making Trading Simpler
It is easier to do something when you know what must and should be done. A trading plan lays out all the criteria that must be met before any trading decision is made. It will always point you in the right direction despite the distractions present.
- Enhancing Objective Decision Making
Trading is about decisions. Good decisions will make you money, while bad decisions will cost you money. Having a trading plan ensures that you will make objective decisions at all times; and not subjective decisions that are driven primarily by emotions which can eventually cost you a lot and put your trades and capital at risk.
- Building Trading Discipline
Trading is a marathon, not a sprint. It is important to build a solid trading plan and follow it with religious discipline throughout your entire trading activity. This is the only path to long-term, consistent profitability in the markets. While traders will generally follow the daily financial news and technical analysis indicator to pinpoint potential trading opportunities, sticking to your trading plan is of utmost importance.
- Highlighting Areas that Require Improvement
One of the core components of a trading plan is a trading journal, which is essentially a diary or record of your trading activity. Journaling your trading activity will help you to assess the performance of your trading strategies as well as other factors of your trading plan, such as risk management and trading psychology. This will, over time, highlight the areas where improvements can be made to help you become a better trader.
Ingredients of a successful strategy (for beginners)
- Personal analysis:
Ensure you are ready to trade and that you are able to follow your signals without hesitation and bias-induced interruption. In time you’ll be able to figure out what your strengths, weaknesses and motivations are while trading.
- Trading goals:
Start off by writing out your trading objectives and setting realistic goals. Look at, and assess your financial goals and timeframes for reaching each trading goal and ensure that when you have made a successful trade you will close the position and not get greedy.
- Assess your trading strategy:
Determine if you have the correct strategies, identify relevant technical analysis (for short term) and fundamental analysis (for long term) identify and take advantage of trading opportunities in the market. It is even wise to test the strategy in a demo account to ascertain its performance before you can roll it out in a live account where real money can be made or lost.
- Perform thorough research:
You must do your homework before you enter an active trading session. This involves being aware of the target market segments and assets to trade, their most important price levels, and their fundamental outlook at the time. Doing thorough research simply means ‘not gambling’ in the trading arena. Research will also boost your trading confidence and make you stay objective throughout your trading activities.
5. Identify your markets and trading timeframes:
Select your market according to your knowledge and expertise. The best market for you is the one that you are familiar with. There is no sense in entering a trade in a foreign market that you have no knowledge about and assuming it will be profitable. In addition, ensuring that you are aware of each market’s trading session hours is necessary, there is a good amount of attention that these trades need at the important trading times.
6. Know up front what you are willing to risk:
Every time you open a position or fund your trading account be sure to enter an amount that will be the maximum amount that you will be willing to risk. Again, do not get emotionally wrapped up in the trades, fund the account and stick to the initial balance. Then decide when to open a position and in which direction (buy or short), basis your analysis and trading strategy signals. Also, always be prepared with risk management strategies for unexpected events.
7. Specify your entry and exit points:
You must set your stop losses and profit targets, while providing room for adjustments but not getting emotionally absorbed by your trading.
8. Comprehensive journaling:
If you want to emulate successful investors and accelerate your learning, try to keep a detailed (or even brief but personal) journal of all your trading activities. This is before you enter a trade, during the trade, and even after the trade is closed. Record your reasons to enter and exit any trade, as well as the targets and underlying emotions or psychological feelings during every stage of your trading activity. If you want to succeed in your trading business, be an excellent accountant – record everything!
9. Analyze your trading plan:
Make conclusions of all your trades and determine what needs to be enhanced, and what areas you will need to improve or adjust.
Top 6 popular trading strategies:
- Scalping Strategy:
One of the most popular short term trading strategies of all times is – scalping. This strategy works to capitalise on small price changes, and the driving force is quantity. You will look to sell as soon as the trade becomes profitable. This is a fast-paced and exciting way to trade, but it can be risky. You need a high trading frequency and favored probability to even out the risk vs reward ratio.
Be on the lookout for volatile instruments, attractive liquidity and be hot on timing. You can’t wait for the market, you need to close losing trades as soon as possible.
- Pyramiding Strategy:
Pyramiding is adding to current holdings/positions as the asset price moves in your desired trend direction. It is a conservative trading strategy that is aimed at lowering risk and allowing investors to decrease their chances of making losses in the long run. Pyramiding should be executed only according to predetermined levels and with an effective stop loss mechanism
The risk-reward trade offs quickly turn against the pyramid trader when the price trend reverses. Because adding to positions changes the total cost of the entire position on a per-unit basis toward the last price, a quick reversal to the original entry price can result in a significant loss.
- Averaging Down Strategy:
“Averaging down” happens when a market participant buys more of a stock they already own after the price has declined. An averaging down strategy works by reducing the average price that shares were bought at, by purchasing additional shares at a reduced price.
In doing so, they will reduce the average price at which they purchased the stock and could stand to realise a greater profit if the market value recovers above the new average price.
- Breakout Trading Strategy:
In trading, timing is the essential factor, especially for intraday traders who want to practice Breakout Trading. This strategy involves identifying the threshold points when the stock prices rise above or fall below the specified price. If the trend continues to soar the prices above the threshold point, the investors consider long positions and buy the stock. On the other hand, if the prices fall below the threshold point, the investor considers short positions or sells current position/holding. The fundamental thought process behind the breakout trading strategy is, if the prices cross the threshold points, they will be more volatile and continue the trend in that direction.
- Reversal Trading Strategy:
In reversal intraday strategy, traders look for those stocks that are at their contextual extreme high and lows, and have a good chance of path reversal. As soon as the movement of the security reverses, a stop is marked and the traders wait for the securities to hit maximum fluctuation. Then a profitable square-off is executed when the reversal value hits the trader’s estimated limit.
- Swing Trading Strategy:
Swing Trading is a strategy that focuses on taking smaller gains by identifying short term trends and cutting losses quicker. The gains might be smaller, but done consistently over time they can compound into excellent annual returns. Swing Trading positions are usually held a few days to a couple of weeks, but can be held longer.
How To Start ?
There are several strategies for intraday traders, but these are some of the best and most used. The key to successful intraday trading is to invest quickly and watch the market trend, and the final step is to decide at the right time.
In short, formulating a trading strategy is necessary for success, but no trading strategy can guarantee success, being profitable in the markets requires consistency, discipline and knowledge – and some good luck.
Choose your trading strategy based on your goals, risk appetite, capital availability and time availability. Keep experimenting, evolving and optimizing your trading strategies that suit your specific requirements.
With your ShareIndia Account you can build, and deploy trading strategies on live markets. Leveraging the right technology, tools and platform can make you way more efficient than any other single step that you can take.
Disclaimer: Any Advice or information in the post is general advice for education purpose only and is not responsible for generating any trading profits for anyone, please do not trade or invest based solely on this information.