What is a Trading Strategy?
Trading in the financial markets makes traders use several different trading strategies to have a planned and profitable trade. However, which one to use and how to use it is also important. Traders using the strategies should not rely on the others’ trade and plans as every trader has a different goal to achieve.
The desire for success is only achieved when traders know and understand the trade and trade strategies. With the trade instrument, traders decide the trade strategies that will best suit their market. It may include the lifestyle, personality, resources, instruments, and factors surrounding it.
Trading strategies are fixed plans that the investors and traders design in advance for the financial purposes. The trade strategy is as per the market position a trader holds, a short position, or a long trade position. The primary reason for the use of trading strategies is consistency, objectivity, verifiability, and quantifiability.
The traders, before using the trading strategy, have to define the terms:
Trading assets
Entry/Exit points
Money management
Trading strategies are formulated based on technical and fundamental analysis. These verify the strategy by backtesting and help traders have a smooth trade experience.
Types of Trading Strategies
There are a number of trading strategies that traders can use for carrying out the trade. Let’s get into the trading strategies type for understanding their use in the financial markets. The paragraph discusses four significant trading strategies with their advantages and disadvantages for traders.
News Trading Strategy
News trading strategy is related to the news and information that a trader must be updated on. For traders investing in forex markets or any other market that has the impact of economic changes, then news trading strategy is a must. The strategy is based on the news and market expectations even before the news is telecast or released.
The strategy requires a skilled mind set with good market knowledge for quick actions. Traders have to be quick and access the news as soon as possible with a fast judgment on the impact of the news on trade.
To use the strategy of news, profitable traders can keep a few points in mind:
For specific news releases, the strategy should also be specific
Traders should consider each news different
The market reactions are significant for the strategies
Traders of news strategy have the following benefits and drawbacks:
Benefit:
Several trade opportunities
Entry and exit are defined
Drawback:
Requires experts
Quick actions and judgment
Overnight risk
Swing Trading Strategy
Swing trading strategy depends on the financial movements in the trade, where traders aim at buying the securities when the market rises and sell the security during the market falls. The traders of swing trading strategy benefit from the market oscillations, with prices moving back and forth.
It is a technical analysis strategy where traders study the charts and patterns to get the trend. Traders have to interpret the length and duration of swings correctly for the correct decision. The strategy helps traders define the support and resistance levels.
In the strong swings, traders use retracement swings which are referred to as pullbacks or the dip of the markets in the trend. In the swing strategy, traders can use the patterns formed for analysis.
Benefits and drawbacks of Swing trading strategy:
Benefit:
Trade opportunities
Easy to use
Suitable for traders with limited time
Drawback:
Requires good research
Overnight risk
Day Trading Strategy
Day trading strategy is popular for the minute traders of the market who usually have multiple trades in a day lasting from a minute to an hour. The strategy is also termed as an Intraday trading strategy. The traders take advantage of the market fluctuations with the opening and closing of the market.
The traders do not leave the market positions open overnight and minimise the risk of overnight changes due to the volatility of the market. However, it requires quick decisions with excellent trade knowledge and experience.
Benefits and Drawbacks of Day Trading:
Benefit:
No overnight risk
Flexible trading
Multiple opportunities
Multiple market positions
Drawback:
Requires fast execution
Flat Trades
Requires discipline for trade
Trend Trading Strategy
Trend trading is a technical analysis strategy that studies the market trends to take action. It is most used, and a useful tool for the market traders, where the price actions are analysed and decisions are taken. However, traders have to maintain patience while using the strategy.
The trader makes decisions based on the market trend. If the trend is increasing, then traders buy, and if it shows a fall, they sell the securities in the market.
Benefits and Drawbacks of Trend strategy:
Benefit:
Useful trade strategy
Several trade opportunities
Studies the market direction
Drawback:
Overnight risk
Why use Trading Strategies?
Trading strategies are used to avoid irrational actions in the market during the high fluctuations and swings of the market. It may be a stock market, forex market, commodities market, etc. Traders can easily execute the trade with a set framework that already defines the terms relating to the market. This makes it straightforward for traders to trade.
The planned and analysed strategies help traders find opportunities easily and be active with the trade. As a result, traders know the market and what steps to take to be at the top and earn high returns on investments.
Conclusion
Trading strategies are necessary for a profitable trade; with the investment, if the trader uses the strategy, they have high chances of earning and more confidence over the decision taken. A trader defines the terms in advance and studies the market, which makes it more convenient for them to decide and execute the order.
However, traders should be experienced and have good market knowledge for a profitable trade.
There are several brokers online that help the trader use the trading strategies such as ROInvesting and ETFinance. They offer services that enhance the trade and make the efforts lesser from the traders’ side.
