Trading strategy is a plan that provides predefined set of rules and principles that a trader has set for themselves to buy and sell in markets. It can also be used to achieve a profitable return.
Trading Strategies are placed to avoid behavioral finances biases and yield consistent results. It can be stress tested under varying market conditions to measure consistency.
There are a lot of trading strategies and some traders will try different established strategies to come up with a unique one that they can apply for themselves. Ideas and best practices need to be researched and adopted then adhered to.
Three Stages Of Trading Strategies
Trading strategies consist of three stages:
- Planning – is a structured method that includes buying or selling exchange-traded fund (ETF), stocks and bonds or other investments and may result to more complex trades such as options or futures.
- Placing trade – means identifying and managing trading costs including spreads, commissions and fees with a broker.
- Executing trade – is a buy or sell order completion, where trading positions are being monitored and managed including adjusting or closing them as needed.
Building A Trading Strategy
Having a well-planned strategy or a profitable trading strategy is an utmost goal of every active trader to achieve trading success. There’s a wide variety of trading strategies and they are largely based on either technicals or fundamentals. Both rely on quantifiable information that can be back tested for accuracy.
To build a strategy, you need to narrow your chart options, choose a time frame that suits your needs, focus on what market you’ll trade and decide what type of trading you’d like to do. It is important also to know which trading style suits you best.
With better understanding, you’ll be able to decide what type of trading strategy you want to use in your trades.
Here’s a list of the different trading strategies:
- Technical Trading Strategy is not necessarily limited to trading, same method practiced by economists. Technical traders rely on technical indicators and chart to generate historical patterns of trading data, anticipate what might happen to stocks in the future and interpret price moves.
- Fundamental Trading Strategy focuses on fundamental analysis like corporate events, actual or anticipated earnings report and stock splits to determine which stock to buy and when to buy it. Fundamental traders take fundamental factors into account. Trading on fundamentals is more closely associated with a buy-and-hold strategy wherein you buy stocks and hold them for a long time with a goal that the value will increase over a long period of time.
- Quantitative Trading Strategy is similar to technical trading but a lot more sophisticated. This rely more on mathematical computations and number to identify trading opportunities and analyze the market. This is highly objective and unsusceptible to the typical pitfalls of human judgment but it doesn’t mean that it has no pitfalls. To know inefficiencies in the market, quantitative traders use several data points like regression analysis of trading ratios, technical data and price.
- Swing Trading Strategy is when trades are usually held for more than a few days to a couple of weeks. Swing traders use a wide array of technical indicators to look for conditions where prices are likely to swing either upwards or downwards. This focuses on taking smaller gains and provides plenty of opportunities to trade.
- Scalping Trading Strategy is used to make hundreds of trades per day and focuses on short-term positions, small profit margins and high levels of leverage. Scalpers attempt to hold their positions for a short period, thus decreasing the risk associated with the strategy.
- Day Trading Strategy often considered a pseudonym for active trading itself. It is a method used by professional traders such as specialists or market makers to buy and sell securities within the same day. Positions are closed and not being held overnight. Day traders are focused to events that cause short-term market moves or small prices move where the profits are made.
Learn more about trading strategies by familiarizing with trading signals.
Read all about it here: https://ibexmarkets.com/the-ultimate-guide-to-trade-signal/