Best trading strategies and techniques

Education /
Desmond Leong

What is a trading strategy?

A trading strategy is a set of rules and guidelines used by traders to make informed decisions about buying, selling, or holding financial instruments such as stocks, currencies, or commodities. It is a systematic approach that helps traders identify and capitalise on trading opportunities based on their analysis of market conditions.

Trading strategies can vary significantly based on the trader's individual style. For example, swing traders focus on medium-term price movements and typically hold positions for several days to weeks. Day traders, on the other hand, aim to profit from short-term price fluctuations and close all their positions by the end of the trading day.

Different trading strategies also consider factors such as risk tolerance, market trends, technical indicators, and fundamental analysis. Traders may use indicators like moving averages, Bollinger Bands, or chart patterns to identify potential entry and exit points. Additionally, some traders rely on price action analysis, which involves studying and interpreting the actual price movements of an asset.

A successful trading strategy is adaptable and takes into account the trader's goals, financial markets, and time frame. Ultimately, it aims to provide a framework for making objective trading decisions and managing risk effectively.

 

Popular trading strategies

Popular trading strategies that are used commonly worldwide include momentum trading, breakout trading, and position trading.

Momentum trading strategy involves identifying and riding on the price movements of financial instruments that are experiencing significant momentum in a particular direction. This strategy is useful for traders who seek to benefit from short-term price trends and capitalise on market movements.

Breakout trading strategy identifies key levels of support or resistance and entering trades when the price breaks out of these levels. Traders using this strategy aim to profit from the potential continuation of the price trend after the breakout. This strategy is useful for identifying potential trading opportunities during times of increased volatility and can be applied to various financial markets.

Position trading strategy describes taking longer-term positions in the market, typically spanning months or even years. This strategy is useful for traders who take a more patient approach and seek to benefit from the overarching market trends. Position traders often rely on fundamental analysis and market trends to inform their trading decisions.

Each of these popular trading strategies has its usefulness depending on the trader's trading style, risk tolerance, and market conditions. It is crucial for traders to understand and adapt these strategies to their individual preferences and goals in order to maximise their chances of success in the financial markets.

 

Trading strategies list

 

Day trading

Day trading is a popular trading strategy that involves buying and selling financial instruments within a single trading day.

Day traders are typically individuals who actively monitor the market, looking for short-term trading opportunities. They use technical analysis, such as chart patterns and indicators, to identify potential entry and exit points.

One of the advantages of day trading is the ability to generate quick profits as trades are typically closed within the same day. Day traders can take advantage of short-term price movements and capitalise on market volatility.

However, day trading also has its drawbacks. It requires a high level of focus, as traders need to closely monitor the market to capitalise on short-term opportunities. Day trading also carries a higher level of risk due to the fast-paced nature of the strategy.

Day trading is suitable for active individuals who have a strong understanding of the financial markets and are comfortable with taking on higher levels of risk. It may not be suitable for beginners or those with limited time to monitor the market.

 

Swing trading

Swing trading is a popular trading strategy that involves capturing short to medium-term price movements in the financial markets. It typically aims to take advantage of the price swings or fluctuations that occur within a set period of time, usually a few days to a few weeks.

Swing trading is suitable for traders who have a moderate level of experience, as it requires some knowledge of technical analysis and chart patterns. It is especially suited for traders who have limited time to monitor the markets on a constant basis, as swing trading positions are usually held for a longer period compared to day trading.

One of the advantages of swing trading is that it allows traders to ride the momentum and capture larger price movements compared to intraday trading. It also provides the flexibility to employ various technical indicators and chart patterns to identify potential trading opportunities. Additionally, swing trading can be less stressful compared to day trading, as positions are held for a longer time frame.

However, swing trading also comes with some drawbacks. It requires patience and discipline, as traders need to wait for the right entry and exit points. There is also a higher level of risk compared to long-term investing, as swing trades are subjected to market fluctuations and short-term volatility.

 

Scalping trading

Scalping is a short-term trading strategy that involves making multiple trades within a very short period. Scalpers aim to make small profits from frequent trades. This strategy is best suited for active and experienced traders who can make quick decisions and execute trades swiftly.

One of the main advantages of scalping is the potential to generate quick profits. Scalpers take advantage of small price movements and aim to capture small profits from each trade. Moreover, since scalping involves multiple trades, it allows traders to maximise their profit potential.

However, scalping does come with its drawbacks. One of the main disadvantages is the increased transaction costs. Since scalpers make frequent trades, the costs associated with commissions spreads, and slippage can add up quickly and eat into profits. Additionally, scalping requires traders to closely monitor the market and make quick decisions, which can be mentally and emotionally demanding.

 

Arbitrage trading

Arbitrage trading is a strategy used by traders to take advantage of price differences in different markets or exchanges. It involves buying an asset at a lower price in one market and selling it at a higher price in another market, thereby profiting from the price disparity.

Arbitrage is most suitable for traders with advanced technical knowledge and access to multiple exchanges or markets. These traders are able to quickly identify and execute profitable trades.

The main advantage of arbitrage trading is the potential for low-risk profits, as price differences are usually short-lived and quickly corrected by market forces. Additionally, this strategy can be executed in any market condition, making it versatile for traders.

However, there are some drawbacks to arbitrage trading. Firstly, it requires high-speed execution and advanced trading tools, which may not be accessible to all traders. Secondly, the profit margins are often small, requiring high trading volumes to generate significant profits. Lastly, arbitrage opportunities are becoming increasingly rare due to advancements in technology and increased market efficiency.

 

Gap trading

Gap trading is a popular and effective strategy used by traders in the financial markets. This strategy works by taking advantage of the gap between the closing price of an asset on one trading day and the opening price on the next trading day.

Gap trading is most suitable for day traders and swing traders who seek short-term profits. It is particularly effective with stocks, futures, and currency pairs.

One of the main advantages of gap trading is that it allows traders to profit from sudden and significant price movements. By entering trades at the opening price after a gap, traders can potentially capture large gains in a short period of time. Additionally, gap trading provides clear entry and exit points, which can help traders manage their risk and minimise losses.

However, there are some downsides to the gap trading strategy. It requires quick decision-making and a good understanding of the market conditions. Also, gaps can often be caused by news events or market manipulation, which makes this strategy riskier compared to other types of trading strategies.

 

Trend trading

Trend trading is a popular strategy used by traders to capitalise on prevailing market trends. This strategy involves identifying and trading in the direction of the overall market trend. Traders who prefer trend trading usually hold their positions for an extended period to maximise their profit potential.

Trend trading is most suitable for swing traders and position traders who aim to capture substantial price movements over a longer time frame. This strategy is particularly effective when the market is trending strongly, and it allows traders to ride the wave of momentum for potentially significant gains.

One of the main advantages of trend trading is that it helps traders take advantage of current trends rather than trying to predict future movements. It allows traders to trade in the direction of market movements and avoid the risk of entering counter-trend positions. Additionally, trend trading can be combined with other technical indicators and chart patterns to enhance trading opportunities.

However, it's essential to note that trend trading also has its drawbacks. Trend reversals can occur unexpectedly, resulting in potential losses for traders who continue to hold positions against changing market conditions. Additionally, entering a trend late may lead to missed trading opportunities or reduced profit potential.

 

Pairs trading

Pairs trading is a popular trading strategy that involves identifying two correlated assets and simultaneously taking long and short positions in them. The goal is to profit from the relative price movements of the two assets, rather than relying solely on the direction of the overall market.

Pairs trading is most suitable for traders who have a good understanding of market dynamics and are able to identify assets that have a historically high degree of correlation. This strategy is often employed by quantitative traders and hedge funds who have access to advanced statistical models and high-frequency trading platforms. However, individual traders can also engage in pairs trading with the use of simple technical indicators and a keen eye for market trends.

The advantages of pairs trading include the potential for consistent profits, as the strategy is based on the historical relationship between two assets. This strategy can also be less risky compared to other trading styles, as it mitigates the impact of overall market movements. Moreover, pairs trading allows traders to create a market-neutral position, which reduces exposure to broader market risks.

However, pairs trading also has its drawbacks. It requires continuous monitoring of the asset relationship and adjusting positions accordingly. This strategy may also involve higher transaction costs due to the need to execute multiple trades simultaneously. Additionally, pairs trading requires a certain level of experience and expertise in order to effectively identify and analyse correlated assets.

 

Momentum trading

Momentum trading is a popular trading strategy that focuses on riding the wave of price movements in the market. It involves identifying the stocks or assets that are experiencing strong upward or downward momentum and capitalising on these trends.

This strategy is especially suitable for short-term traders like day traders and swing traders who aim to profit from the rapid price changes within a trading day or a few days. Momentum traders typically rely on technical indicators, such as moving averages or relative strength index (RSI), to identify overbought or oversold conditions which can indicate potential price reversals.

One of the biggest advantages of momentum trading is the potential for high-profit opportunities during periods of strong market trends. Traders can quickly capitalise on upward or downward moves and potentially earn significant returns. Additionally, momentum trading allows for smaller initial investments, as traders can enter and exit positions frequently.

However, there are also risks involved with momentum trading. It requires a considerable amount of time and effort for continuous monitoring of market movements. Moreover, there is a higher risk of false breakouts or sudden reversals, which can result in substantial losses if not managed properly. Furthermore, momentum traders need to have a solid understanding of technical analysis and be able to make quick decisions in fast-paced market conditions.

 

Range trading

Range trading is a popular trading strategy that involves identifying key levels of support and resistance in the market and taking advantage of price movements within that range. Traders who are patient and prefer a more conservative approach often find range trading to be a suitable strategy.

The range trading strategy requires traders to buy near support levels and sell near resistance levels. This strategy is well-suited for swing traders and position traders who are comfortable holding their positions for an extended period of time. It works best in markets that are consolidating or trading in a sideways manner, as price movements are limited within a defined range.

One of the main advantages of range trading is the clear and precise entry and exit points it provides. Traders can easily identify support and resistance levels and use them to determine when to enter and exit trades. Additionally, range trading allows for a more controlled risk management approach, as traders can set stop-loss orders near the support and resistance levels.

However, range trading does come with a few drawbacks. First, it requires a good understanding of technical analysis and the ability to identify reliable support and resistance levels. Second, range trading can be less profitable in volatile markets or during trending periods, as price movements may break out of the defined range. Lastly, it requires patience and discipline, as traders need to wait for the price to reach the desired levels before entering or exiting trades.

 

Position trading

Position trading is a long-term trading strategy that involves holding a position in a financial instrument for an extended period, ranging from weeks to years. This strategy is particularly suited for traders who have a longer time horizon and seek to capitalise on fundamental factors and market trends.

One of the main advantages of position trading is that it allows traders to capture significant price movements and profit from larger market trends. It provides the opportunity to participate in the full potential of a market trend, maximising potential gains. Additionally, position trading requires less time and effort compared to more active trading strategies, making it suitable for traders with limited time availability.

However, position trading also comes with its challenges. Traders must be patient and have the ability to weather short-term market fluctuations without being shaken out of their position. This strategy also requires strong fundamental analysis to identify potential opportunities and thorough risk management to mitigate potential losses.

 

Breakout trading

Breakout trading is a popular trading strategy employed by many traders in the financial markets. It involves identifying key levels on a chart where the price has the potential to break out and make a significant move in one direction. Traders who are actively looking for short-term trading opportunities often use the breakout trading strategy.

A breakout trading strategy is especially suitable for day traders and swing traders who seek to capture quick profits from short-term market movements. This strategy allows traders to take advantage of price momentum and capitalise on significant price moves that occur when the price breaks through support or resistance levels.

One of the main advantages of a breakout trading strategy is that it provides a clear entry and exit point for trades. Traders can set stop-loss orders just below the breakout level to limit potential losses, while profit targets can be set at a predetermined distance from the breakout level to maximise potential gains.

However, there are also some drawbacks to using the breakout trading strategy. False breakouts, where the price briefly breaks through a level and then quickly reverses, can lead to losses. Additionally, breakouts can be difficult to identify accurately, requiring a thorough understanding of technical analysis and the ability to interpret market trends effectively.

 

News trading

News trading is a popular strategy among traders who aim to capitalise on short-term market movements caused by significant news events. This strategy involves taking positions based on the impact of economic releases, company announcements, government policies, or geopolitical developments on financial markets.

News trading strategy is most suitable for traders who have a strong understanding of fundamental analysis and can quickly interpret the implications of news on specific financial instruments. Day traders and swing traders can benefit from this strategy, as they actively monitor and trade during the day or over a few days.

The main advantage of news trading is the potential for high volatility and large price movements, presenting significant profit opportunities. Traders can quickly enter and exit trades based on the news, taking advantage of short-term price fluctuations. Additionally, news trading allows for precise entry and exit points based on the release of information.

However, there are also drawbacks to this strategy. The fast-paced nature of news trading requires traders to make quick decisions and execute trades promptly, which can be challenging for beginners or those with limited experience. Furthermore, there is a risk of market volatility causing slippage or whipsawing, leading to potential losses.

 

End-of-day trading

An end-of-day trading strategy is a popular trading technique where traders analyse the market and make trading decisions at the end of the trading day. This approach primarily targets swing traders and position traders who prefer longer time frames and extended periods to manage their trades.

One of the key advantages of end-of-day trading is that it allows traders to avoid the noise of intraday price movements and focus on the bigger picture. By analysing market conditions at the end of the trading day, traders can make more informed decisions based on the overall trend and fundamental analysis.

This strategy is suitable for those with limited time to trade, as they can dedicate a specific time slot during the day to analyse the market, set their trades, and monitor their positions. End-of-day trading also helps traders avoid the emotional stress associated with continuous monitoring of trades throughout the day, making it ideal for those with a low-risk tolerance.

However, one drawback of end-of-day trading is that traders may miss out on short-term trading opportunities and quick price movements that occur within the trading day. Additionally, since trades are set at the end of the day, traders may experience slippage in their execution, particularly in fast-moving markets.

 

How to choose a trading strategy

When it comes to choosing a trading strategy, traders need to consider their trading style and objectives. Here are some key factors to look out for:

  1. Determine your trading style: Are you a day trader, swing trader, or position trader? Your trading style will dictate the type of strategy that suits you best. Day traders focus on short-term price movements, while swing traders look for medium-term opportunities. Position traders take longer-term positions based on fundamental analysis.
  2. Assess risk tolerance: Trading involves risk, so it's crucial to understand your risk tolerance. Some strategies, like day trading, can be more volatile and require quick decision-making. On the other hand, position trading allows for a longer-term view and potentially reduces stress.
  3. Consider time and commitment: Evaluate how much time and effort you can dedicate to trading. Day traders, for example, require being actively involved during trading hours. Swing traders may need to monitor positions regularly, while position traders are more hands-off.
  4. Analyze market conditions: Different strategies work well in specific market conditions. Consider whether the strategy is suitable for trending or ranging markets, volatility levels, and potential profit targets.
  5. Test and refine: Before committing to a strategy, test it with virtual or small real trades. Assess its profitability, ease of execution, and compatibility with your skills and resources.

By considering these factors, traders can choose a strategy that aligns with their trading style, risk tolerance, and market conditions. Remember, no strategy guarantees success, so continuous learning and adaptation are essential for long-term profitability.

 

How to get started with your trading strategy

Implementing a trading strategy involves putting your plan into action to take advantage of potential opportunities in the financial markets. To start, you need to identify your preferred trading style, whether it's day trading, swing trading, or position trading, based on your risk tolerance and time commitment.

Once you know your trading style, it's important to choose the right financial instruments to trade. This can include stocks, currencies, commodities, or indices. Technical analysis is crucial in identifying key levels and chart patterns that can help determine entry and exit points. Traders can use tools such as resistance levels, technical indicators, and Bollinger Bands to make informed decisions.

Backtesting is another critical step. By simulating your strategy with historical data, you can assess its past performance and determine its profitability. This process helps traders identify any flaws or areas of improvement while fine-tuning their approach.

To effectively implement your trading strategy, it's important to stay updated on current trends and market conditions. Constant monitoring of price movements and market news can provide valuable insights for better trading decisions.

Driving profitability with your trading strategy requires discipline and a systematic approach. Managing risk and setting realistic profit targets are key factors that can contribute to long-term success. Additionally, executing trades with proper risk management techniques, such as setting stop-loss orders, can protect your capital and minimise losses.

By diligently implementing and constantly refining your trading strategy, you can increase your chances of achieving profitability in the financial markets.

 

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The images shown are for illustration purposes only. This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, and needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability with regard to the accuracy and completeness of the content in this publication. Readers should seek their own advice.



Desmond Leong

Desmond Leong

Desmond Leong runs an award-winning research team (2019, 2020, 2021 Finalists for Best FX Research and Best Equity Research) advising the largest banks and brokers on where the markets are heading. He specialises in technical analysis with a focus on Fibonacci, chaos theory, correlations, market structure, and Elliott Wave.

Desmond is incredibly passionate about helping people become better traders - working closely with Axi to produce educational videos, quizzes, e-books, indicators, and market research to help traders take their game to the next level. His team is also behind the Axi VIP portal, dedicated to continuing to guide and educate traders.

Find him on: LinkedIn | Instagram


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