Investors are just as different and varied as the trading strategies they use.
Employing a trading strategy comes down to what best fits your personality and circumstances. Everyone trades for different outcomes, so employingan across-the-board trading method doesn’t work.
There are investors looking for short-term gains with time to spend monitoring market trends. Then there are investors who eye more long-term profits or even a consistent income stream from investing.
No matter what your reason for trading, it’s important to understand the different strategies out there. You may employ one or even more than one, but knowing the different ways to trade can only make you better at it.
For the purpose of this, we will outline the four types of trading strategies you should know.
4 Types of Trading Strategies
1. Day Trading
It’s just like it sounds.
Day traders are those only interested in holding stocks for a day. They may enter the trade in the morning and sell in the afternoon before the market closes.
Being a day trader means you rely pretty heavily on fundamentals and technical analysis to spot trends in the market. You will look at indicators like the Moving Average Convergence Divergence (MACD), the Relative Strength Index and the Stochastic Oscillator for those trends.
Day trading doesn’t take as much time to do like some of the other strategies, but you have to be disciplined enough to examine those technical factors in an instant.
The other thing to take into consideration is that day traders expect smaller profits compared to other strategies. You have to be careful not to let a slumping stock you bought in the morning carry for too long as that will eat into your profits.
Some things thing day traders can use to help offset the potential for a larger daily loss stop-loss trades and limits. Using those keeps your risks smaller and allow you to capture profits.
2. Swing Trading
If you aren’t interested in the speed of day trading, and few people are, perhaps swing trading is a better strategy option for you.
Swing traders look at short- and medium-term market movements to make their trading decisions. This means, instead of solely focusing on fundamentals, they are looking more for momentum or breakout stocks to buy.
The benefit is that swing traders will hold positions for several days and even weeks. If you are a swing trader, you aren’t locked into looking at charts and graphs all day. It’s a good strategy for people working outside the market or who just want to trade more leisurely.
Quite simply, if you are a swing trader you are looking to buy into a long position and sell out of a short position to maximize profits. The downfall is those market swings are usually attached to more volatile stocks.
If the market is your game and you have the time to dedicate to short-lived trading, scalping could be your best strategy.
Scalpers focus on holding their positions for a matter of seconds or minutes. You want to make rapid, small gains and let those accumulate over a day.
They also look at more liquid markets, like currencies. Scalpers also look for tighter spreads — the difference between the buy and sell price — so as not to eat into profits.
Being a scalping trader requires a lot of time and quick diligence. Part-time traders are not suited for scalping because of the rapid pace of trading.
While not completely limited, scalp trading typically happens when trading sessions overlap. That’s when the trading volume and volatility is at its highest.
It’s an intense, time-consuming strategy, but one that can yield solid profits in a day if done correctly.
4. Position Trading
The most common trading strategy among part-time or hobby traders is position trading.
This strategy entails holding positions over a much longer period of time — weeks, months and years.
Position traders are looking more at an overall market trend and not on short-term fundamentals or momentum.
While you are holding positions for a longer period of time, there are some risks associated with position trading. You may garner more in profits because of the duration of the trade, you can also lose more for the same reason.
Position trading requires a lot of patience and the ability to weather short-term downtrends in the market. You have to understand you are running a marathon, not a sprint.
You’ve learned the four primary types of trading strategies, but there are others you should know about. They are:
- High-frequency trading: While it’s not necessarily a trading style per se, high-frequency trading involves using algorithms to put in a large number of orders in just seconds. High-frequency trading is used more by large companies than individuals because of the massive volume of trades at one time.
- Trend trading: This is another style that relies heavily on technical analysis. As the name suggests, traders use that analysis to find market momentum. Trend trading usually works well for position or swing traders. Trend trading also factors in moves against a prevailing trend, called retracements. If a stock is trending up and takes a momentary dip, that’s not an issue. But if the retracement is longer, it could signal time to sell the position.
- Range trading: This style works best with scalpers, but it can be used with other strategies as well. Range traders look at trading within the lines of support and resistance. Those moves can be volatile but can provide solid profits if employed correctly. Short-term traders look at range trading as a way to capitalize on changes within support and resistance levels.
- Breakout trading: Trading breakouts means you are looking for stocks poised to move over their support levels. If a stock has a support level of $10 per share and your analysis indicates a breakout, it would be good to buy. Once that breakout subsides, selling can bring profits. Using a limit-entry order can make sure a breakout trader automatically locks in gains.
- Reversal trading: Using this strategy means you look for current trends in a stock price to change direction. You have to be careful not to confuse a reversal with a retracement. The trend switch has to be longer in term than that, otherwise, you risk profits.
Now You’re Ready To Go
Now that you understand the four different types of trading strategies, you can determine which works best for you. Once you’ve identified that strategy, start doing your research to understand what you should look at to execute the best trades and make the most profit.