A trading strategy is a plan that traders follow to enter the market based on their goals and the time they expect to achieve them. All traders operate in the financial market based on a strategy they design taking into account two factors. The first is the benefits they expect to get and the second is the time they expect that profitability to arrive. Generally, those who seek large profits go long and those who seek small profits invest in short positions.
How to create trading strategies that work
To be able to create a trading strategy that yields results, the operator must analyze himself, study the state of the financial market, be able to interpret the charts, and, above all, try to anticipate the oscillations that the values of the assets can suffer.
What is the best online trading strategy?
Another question is to know which is the best trading strategy. There is no definitive answer since each plan is adapted to the trader’s objectives, but there are some that are widely used and can generate significant profits if properly executed.
One of these is intraday trading which is based on opening and closing all operations before the market closes. Execution reduces risks on costs. It is mainly based on keeping an open position during the night (overnight). Another widely used is position trading; in this case, the position is opened for the long term, sometimes lasting several months and even years.
What is the difference between trading and investing?
When I tell people I’m investing in the stock market, many follow the conversation with the following question: “Oh, so you’re a trader?” When I tell them yes but that’s not what I’m referring to, they remain with a total question mark in their eyes and an automatic silence. That’s when I usually explain the big difference between the two realities, to the great surprise of those present.
The confusion is logical, because in reality when you invest in stocks you also have the possibility of trading with such instruments; they are still completely different ways of investing. Some do not even consider trading within the investment category, if not something more like playing or betting in a casino.
The truth is that both are great options to generate income, but one of them may be more suitable for you than the other.
There is a big difference between investing and speculating, and while both investing and trading have a bit of both, trading definitely has many more speculative connotations. In an investment in the stock market, a previous analysis of the company whose shares you want to buy is necessary to ensure that it will be profitable in the future, so you investigate the company and its results.
On the contrary, in speculation, you simply make a hypothesis about where you think the price of a share will go, if it will go up or down, based on buying or selling trends, or what you think the market will do. This does not mean that when investing in the stock market there cannot be speculations, or that when trading there are no analytical phases, but your investment will depend more on the style you will apply. I would say that investing in the stock market is 80% analysis and 20% speculation, while trading is 80% speculation and 20% analysis.
On which markets you can apply trading strategies?
Trading strategies can be applied to any asset traded on a financial market: stock trading, stock indices, commodities, futures, options, currencies, and cryptocurrencies. In all cases, the concept is the same: knowing when is the best time to buy and sell.
Let’s see which are the most important markets:
- Stock market
- Foreign exchange market
- Commodity market
- Futures market
- Cryptocurrency market
- Index market
- Bond market
- ETF market
1 – Stock market
It will allow you to acquire titles (units) or buy shares of a certain company. If you want, you can invest in Apple, Amazon or other companies listed on the stock exchange.
2 – Forex market
Here you speculate on currency pairs and it is the most liquid market in the world. In Forex, large amounts of money are moved every day.
Some of the most common strategies in Forex are:
- Forex Scalping Strategy
- Fractal Trading
3 – Commodity market
The commodity market includes food, energy resources (oil, gas), wood, precious metals (gold and silver), etc.
When you invest, you will have the possibility to invest in various commodities. For example, you can invest simultaneously in gold, silver, gas, sugar, and coffee. This way, you won’t depend on a single result.
4 – Futures market and options market
In this market, there is an agreement between two parties on the sale of a financial product (commodities, currencies) whose value is based on another asset (underlying asset).
In other words, the futures market is the place where you can buy or sell financial products. These two actions (sale and purchase) are formalized through contracts.
In the options market, one of the most popular strategies is the Strangle strategy and the spread trading strategy.
5 – The cryptocurrency market
The cryptocurrency market is one of the most well-known. In fact, it is the alternative par excellence to the current monetary system.
This market is totally decentralized. You will be able to buy virtual currencies such as Bitcoin, Ethereum, Ripple, Cardano, etc.
If it’s your first time, we recommend starting with Bitcoin, as it is still the main crypto and the one that will reach the highest value in the future.
6 – Index Market
There are many stock indices in the world, but not all of them have the same relevance.
The index market represents the movement of the different stocks that make up a stock market or a specific sector.
The most popular are SP500, DAX, DOW JONES, and NASDAQ 100.
7 – Bond Market
Also known as the debt market. A bond is a fixed-income instrument.
This market is one of the safest and most profitable in the world. Debt securities are issued and traded by sovereign states and companies.
8 – ETF Market
ETFs (Exchange Traded Funds) are low-cost management funds traded on the stock exchange like normal stocks. They are characterized by the fact that their only objective is to faithfully replicate the performance and therefore the return of stock indices, bonds, or raw materials.
What is the best market for trading?
It depends on your criteria and what you are looking for. Both the stock market and the foreign exchange market are well known. However, we really like cryptocurrency. With which will you get the most profitability?
There is no better market than another, everything is relative. Of course, if you are looking to invest in Apple, you will have to buy shares, but if the Dow Jones catches your attention, you will go to an index.
The important thing is to be clear about what you want to invest in and your economic and temporal needs.
What is Copy Trading?
Copy Trading is a form of investment in which investors can copy the operations of other experienced investors. This technique allows investors to learn and profit by earning, using the strategy and knowledge of the most successful traders.
The investor does not hand over his funds into the hands of the other operator, as is the case with normal investment methods. In this case, the investor only has to open a personal trading account and link it to the selected Traders account, with a simple click.
Also known as Mirror Trading, over the years this methodology has been perfected to become the most used passive investment system in the world.
It is mainly novice investors who use this automated trading method, also for educational purposes: by observing what the most experienced and profitable traders do, it will be possible to learn the winning strategies for investing in the stock market more quickly.
Investors can use copy trading platforms to select the traders they want to copy. The platform will then allow them to monitor and copy the trades of those traders. Investors can open and close positions manually or set up their accounts so that they open and close positions automatically based on the performance of the trader they are following.
Copy Trading: Pros and Cons
Among the advantages of copy trading, we find:
- Time-saving: there is no doubt that there is a considerable saving of time compared to manual trading since once the investors to be copied have been selected, it is not necessary to stay in front of the charts to manage the trades.
- Diversification: we can select active traders in stocks, others in forex, and others in cryptocurrencies. In short, our portfolio will be well diversified just by choosing different investors.
- Learning: it allows investors to learn well, using the strategy and knowledge of the most successful traders.
- Profitability: by investing in experienced traders, it is possible to obtain a higher return than when investing alone.
- Simplicity: it eliminates the need to analyze and closely monitor the financial markets since everything is managed automatically by the platform.
Among the disadvantages:
- Risk: by investing in other traders, you run the risk that those traders may have a bad day or take a series of losses, which could negatively affect the results.
- Commissions: some platforms charge commissions for copied operations, which can reduce the profitability obtained.
- Time: it requires a certain level of dedication and time to select the right traders and monitor the performance of the investment.
How to Know When to Exit a Trade?
Knowing when to enter a trade is important, but knowing how to exit it correctly is much more important.
The problem is that if you don’t learn to do this, you lose money (or stop making it) and your trading doesn’t improve.
When you set one or more goals, you must determine the scenario in which you are. A medium-term purchase operation at the maximum is not the same as a sale operation at the break of support. If a purchase operation is proposed in a clear bullish scenario, the normal thing is that there is no relevant resistance below the target level.
A highly recommended option is to set a very wide goal, in case you forget to have the open operation. I usually put it at double the admission price and a little more. But you can set it as you find it more comfortable or not set it directly.
Now imagine doing short-term trading. What you are looking for is to capture a price movement between relevant levels in a period of days or weeks. Logically, you will have to set your goal before reaching the next relevant level.
You can’t leave the price free, without goals, hoping that it will exceed that level and you can make more money. And if you do, you are not properly determining the current scenario.
This also includes intermediate levels:
- If your trading plan includes an intermediate level in some way relevant, you will have to put a partial intermediate goal, you can not ignore it.
- There may be operations that go straight to the target, but there will be many others that turn before reaching it.
Does this mean you always have to go all or nothing?
Not necessarily. On many occasions, it is advisable to update the stop loss, to the price movement, through a trailing stop. By making a good trailing stop in defensive points, you ensure a part of the benefits. Even with partial closures.
But it is very important to set the stop loss at the right time so that the price does not take you out too soon or too late and therefore you are giving money to the market.
Another option to return as little as possible to the market, in case our operation does not go as expected, is to move the stop loss to the real break-even when our trading plan allows it. With this, what you do is attach the stop loss to the exact point where you recover the total value of your investment, including commissions.
That is, you neither win nor lose.
Just like the trailing stop, setting the initial stop loss at break-even is your decision and depends a lot on the context of each operation and your trading plan. Stick to your trading plan. Record this phrase because it is the one that will make you a winning trader after a while. When you exit a trade you have to do what your trading plan says.
A plan that you have clarified in writing, if possible, and to which you must adhere, whatever happens.
Sticking to it is what will make you identify errors faster and learn from them. Don’t improvise.
In short, I want you to be clear about the importance of knowing how to do well in an operation and therefore get the most out of it. It is impossible to guess the perfect time to get out. At least, it is impossible to do it on purpose.
Fortunately, one day you might sell at the highs or buy at the lows. But it will have been just that: luck. And a lot.
Read also: Risk-return ratio in trading.
Choosing the Best Trading Platforms
Here are the Top 5 brokers offering the best platforms where to trade:
|IG (Proprietary + MetaTrader 4 or ProRealTime)||Access to global markets, and advanced and professional tools.|
|XTB (xStation)||Macroeconomic news, trading on more than 3,000 markets.|
|Interactive Brokers (TWS)||Access to global markets, advanced and professional tools.|
|Pepperstone (MT4-MT5-cTrader and TradingView)||No minimum deposit. Demo account and great customer service.|
The Most Common Trading Strategies
There are hundreds of trading strategies. The important thing is to choose one that suits your needs. One of the characteristics of trading is that each person can have a different perspective of the activity depending on their experience and personality. For this reason, when choosing a trading system, you cannot base it on the claim of a third party that with a certain system you will have a guaranteed profit.
Your selection should be very personal, based on your goals, level of experience, personality, time, etc. These types of factors can influence a perfect, devastating strategy on paper to be the worst model and investment experience for you.
Study the available options, seek advice from industry experts, and carefully evaluate the advantages, disadvantages, and general features to design or choose a plan that fits your way of working and makes it easier for you to comply.
Before you start to delve into the various tools and strategies, ask yourself:
- How much time do I have to devote to trading?
- What training do I have? Do I have a good knowledge of the various markets and can I analyze them?
- What is my main goal? Do I want quick profits or future ones? Live from trading or increase your savings?
- How much am I willing to lose?
With the answers to these specific questions, it will be easier for you to trace a path to follow.
Let’s look together at the most common strategies on which to create your own modus operandi.
Day Trading Strategies
In Day trading all positions are closed before the end of the day. With this method, traders seek to protect themselves from possible fluctuations that may occur during the market closing hours and that can affect the result of their transaction.
Intraday traders must be aware of news and events that can affect their investments. In addition, when you trade by quickly opening and closing positions, you must have enough time to be aware of the movements and be able to act just as quickly at the necessary moments.
- Quick results: this does not mean quick profits, but you will know if you have made a mistake or not in a short period of time. In day trading there are positions that are held for a few minutes.
- No risk of closure: by closing the positions at the end of the day, the possible fluctuations of the market will have no effect on your performance.
- Exciting: many traders often appreciate the adrenaline rush that comes from making quick decisions. This advantage for some can be a disadvantage for others.
- Flexible: you can enter, open a couple of positions a day, and exit, to fit a certain schedule according to your availability.
- There is not much time to think: decisions must be made quickly. That is why it is important to set profit and loss limits.
- You must be very disciplined: traders who use this strategy can fall into what is known as “overtrading” and it is difficult for them to withdraw in search of greater profits. On the other hand, day trading can also create addiction. Therefore, it is necessary to be focused and respect the work plan to avoid these negative practices.
Scalping trading: strategies
Scalping is a strategy that can be considered a form of day trading. It consists of opening and closing positions in small value variations, these operations are quite short, some with durations less than a minute.
Traders who use this methodology are known as scalpers.
To carry out scalping it is necessary to operate in a highly volatile and unpredictable market, that is, one that presents more daily fluctuations but where it is possible to follow operational patterns.
Many scalpers use automated trading systems, which allow them to establish positions faster than human capacity. Set the parameters to avoid losses and determine profits.
- A high win/loss ratio.
- It does not require knowledge of fundamental analysis and values in general.
- It can be managed with a small capital.
- Reduce risk exposure.
- They are ideal as a strategy for Forex, indices, and commodities.
- It requires practice and precision.
- As it requires few investments, it also implies low profits.
- Commission fees may accrue.
- Due to the high level of concentration required by the activity, it can become oppressive and exhausting.
Swing Trading Strategy
In Swing trading the trader uses a combination of fundamental analysis (external factors that influence value) and technical techniques (analysis of the historical behavior of prices) to predict a sudden movement or a “swing”.
Movements have a maximum, which is when they reach a high rise, and a minimum, which is when they reach a descending peak.
When we analyze the movements of a given asset, we can see that it moves in waves, the peaks and the minimums are the oscillations. The goal is then to open positions when the price is at its maximum and wait for the market correction to close or vice versa.
This type of system does not have a defined period, positions can be kept open for hours or weeks, waiting for the expected trend or the expected correction to develop.
- Time: it does not require the time commitment that day trading requires, so it is possible to only dedicate a few hours a day.
- It can be very profitable: with good analysis and sticking to the initial trading plan, this strategy can bring great benefits.
- It is exposed to intraday market fluctuations and price gaps.
- Swings are difficult to calculate, even for the most experienced traders.
Position trading Strategy
Position trading is a long-term strategy that aims to hold one or more titles for long periods of time, which can range from months to years, in order to obtain future profits.
Traders who use this strategy rely on fundamental analysis to find stocks and estimate their development, but they do not worry about daily market fluctuations. They can in turn use technical analysis to determine the exit point.
The main goal of this strategy is to follow trends. It invests in a value that is estimated to continue to rise and the position is closed when it is believed to have reached the highest peak value. It is important to determine protections and stop loss levels to avoid sudden changes resulting in a complete loss of capital.
- It does not require constant monitoring.
- The stress caused by market fluctuations is avoided.
- They are usually much more profitable.
- They are less risky.
- Some unpredictable movements or oscillations can become a trend and go unnoticed.
- The capital is not available while the position is open.
- Periods of instability can cause damage to investments.
Trend Following Strategy
The main goal of this system is to follow the direction of market trends in order to obtain profits, taking advantage of both bullish and bearish ones.
This strategy has proven to be the most effective in the Forex market, because in this market trends can last for days and days, maximizing profits.
Technical analysis is often applied to try to predict a new trend. The main goal is to get one and pursue it until its completion.
To determine trends, traders use breakout indicators. A breakout occurs when the price moves above or below previous highs and lows. Once the breakout occurs, the trend can last for days.
- Indicators allow us to identify trends early enough to enter in advance, maximizing profits.
- Inputs and outputs do not necessarily have to be exact. Accuracy is not a fundamental requirement. If the trend is long-term, this translates into less time spent trading.
- Since the way of operating is slow, commission costs do not accumulate and tend to have lesser weight.
- Risk control is determined by the same action plan. Close when the trend ends.
- Most of the time the market is consolidated, false trends can be synonymous with greater losses.
- A large capital is necessary to be able to carry out an efficient follow-up.
- The strategies mentioned are only a small part of the many existing and available for trading on financial markets. A truly effective system is one that combines all the elements that fit a particular trader.
- The most important thing is to develop a plan, not to leave an investment to chance and risk our financial health. It is worth noting that the choice of a trading system can be a dynamic process, testing which is most effective and easiest to follow. Different strategies can also be combined to adapt them to our operating style and our goals.
Algorithmic Trading Strategies
Let’s open a brief parenthesis also on algorithmic trading. In machine learning-based trading, algorithms are used to predict the range for short-term price movements with a certain confidence interval. Machine Learning-based models can analyze large amounts of data at high speed and improve themselves through this analysis.
All algorithmic trading strategies currently in use can be broadly classified into the following categories:
- Momentum-based or Trend Following Algorithmic Trading Strategies
- Algorithmic Arbitrage Trading Strategies
- Algorithmic Statistical Arbitrage Trading Strategies
- Algorithmic Market-Making Trading Strategies
Trading Strategies based on Technical Analysis
Technical analysis-based trading strategies refer to a market (Forex, stocks, etc.) and some indicators that we use to determine entry and exit positions from that market. Among the main technical analysis strategies we include:
What are the most common mistakes newbie traders make?
Inexperienced traders often fail to have a plan, manage risk, or follow their plan, thereby often leading to losses.
How can I learn to trade?
There are many different ways to learn to trade. You can read books and articles, take courses, or watch videos. However, the best way to learn is by doing. Start by trading with a small amount of money and gradually increase your risk as you become more experienced.
What is the role of psychology in trading?
Psychology is a major factor in trading success. Traders who are able to control their emotions and stay disciplined are more likely to be successful.