07 Feb
07Feb

Participating in the financial markets presents you with the opportunity to take part in a global marketplace with high profit opportunities and also the possibility of losses too. 

Trading Instruments.

A trading strategy is a fixed method, rules or plan for buying and selling financial securities to generate profitable returns. Trading strategies can be simple or complex and involve specific considerations like: Risk tolerance, Investment style, Market cap, Technical analysis, Leverage, Fundamental analysis, Time horizon and so on. The bottom line is, Trading strategies help in providing traders with objective analysis and decisions that should be followed diligently.

Let's identify the types of traders or trading styles that traders adopt before taking on the market.

1. DAY TRADING.

  Certainly one of the most well known trading forms. Day traders buy and sell securities within the same day. They take advantage of price fluctuations in-between the markets open and close hours, Holding multiple positions in the day but close all positions at the end of the trading day. They do not leave open positions overnight in other to minimize market volatility risks.

Day trading is mostly done by experienced or professional traders and market makers. They employ economic calendars, indexes and base most of their trading decisions on fundamental global economic events.

DAY TRADING BENEFITS AND DRAWBACKS.

  • Multiple trading opportunities
  • Flexible trading time
  • No overnight trades
  • Limited intra-day risks
  • Lots of disciplined required

2. SWING TRADING.

  Swing trading refers to trading both sides of the movement of any financial asset. Swing traders take advantage of the market's oscillations as the price moves higher and lower. This is mostly a trend following strategy and relies more to the side of technically analyzing markets by studying charts, interpreting duration of price swings, defining support and resistance zones and making judgment on individual movements that comprise a bigger picture of the the market trend. Unlike day traders, Swing traders hold their positions open overnight. Their trades can last from several minutes, hours, days and weeks.

SWING TRADING BENEFITS AND DRAWBACKS.

  • Lots of opportunities for traders to go long and short.
  • overnight risks due to market volatility
  • Lots of research required.

3. SCALPING.

  It's about identifying and exploiting bid-ask spreads that are a little wider than normal due to temporary imbalances in demand and supply. Scalpers or intra-day traders as they are mostly known place very short-term trades with little price movements. Their aim is to make small profits from trades hoping the small profits accumulate.

SCALPING BENEFITS AND DRAWBACKS.

  • No overnight trading risks
  • Lots of trading opportunities
  • Requires discipline
  • Extremely tense market environment - The slightest price movement are important to scalpers
  • Scalping requires high volatility and trading volumes to be worthwhile.

4. POSITION TRADING.

  A popular trading strategy where traders buy and hold a position for a long and extended period of time. Usually from weeks, months to years. Position trading employs lots of patience and ignores minor price fluctuations in the market, instead focusing on the macro view of the market.

Position traders in general use a trend following strategy and fundamental analysis to identify trending markets and determine ideal exit and entry points in any market.

POSITION TRADING BENEFITS AND DRAWBACKS.

  • Less stressful.
  • High profits mostly due to high leverage.
  • Significant losses too when minor price moves become major market turning points.

WHAT IS THE BEST TRADING STRATEGY.

  The best trading strategy is a subjective matter because some of the above listed strategies will perform excellently or poorly in specific market conditions. It's vital for traders to fully understand the current state of whatever market they're working with before deciding on what strategies will be best suited to trending, ranging or volatile market condition. some traders combine more than 1 type of trading style. Each individual must find what works best.

A trading strategy should rely on technical and objective data for consistent results to be achieved. Traders who follow pre-defined rules are less likely to act on external influences or behavioral bias.

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