How to Choose a Trading Strategy
Having a solid trading strategy is key for the success in financial markets. Without a method to approach the market, you will be shooting in the dark.
A trading strategy is essentially a plan of action for navigating financial markets and is constructed based on specific predefined rules and can be very simple or complex, depending on the rules applied or the range of assets traded.
Formulating a trading strategy is necessary to ensure your chance at success in the markets. If you are wondering about the different types of trading strategies out there, how to use them, and how to better understand them, then read on. We’ll go through all the basics in this post.
Table of Contents
- Types of Trading Strategies
- How to Choose the Right Trading Strategy for You
- Understanding Your Trading Strategy
Types of Trading Strategies
A trader can choose how to frame the market with a trading strategy, or even combine multiple strategies (but this is recommended for more advanced traders). Not every strategy will work at all times, but it’s a good idea to have some way of structuring your approach to trading the markets.
Some of the most common trading strategies are as follows:
Fig 1: Some of the most common trading strategies.
Day Trading is a strategy in which the trader purchases and sells securities within a single day, or perhaps even a single session (e.g. New York trading hours).
With this approach, a trader seeks to profit from fluctuations that occur throughout the day. Day trading eliminates the risk of gaps in opening and closing prices, since all positions are closed before the end of the trading day.
Scalping is a trading strategy that focuses on making profits from small changes in price by buying and selling swiftly.
This strategy requires a speedy internet connection and access to high-quality live data of the market. The good thing about this strategy is that even if it seems like the market has barely moved in a day, a good scalper could have still eked out a decent profit from the micro swings.
Swing trading is a strategy that incorporates entering and exiting trades over multiple days. Traders using this strategy are on the lookout for the big swings in market prices, hence the name.
News Trading is based on judging market expectations of events and breaking market news. With this kind of strategy, the trader needs to consider the implications of the latest news and trade accordingly. The trader can also attempt to predict the impact of upcoming news events on the market.
While it is a good idea to have a general understanding of market fundamentals and macroeconomic factors, it isn’t absolutely necessary to understand deeply, since the idea is to trade around the price reactions to these events.
Position trading is a strategy that involves holding a security for a mucher longer time than even swing trading, ignoring volatility. This type of trading might miss the potential profits with swings within the market, but will reduce the stress of managing positions, instead trading with a clear target in mind.
Algorithmic trading is when a strategy is automated, taking the element of human decision out of the equation. Algorithmic trading systems can be anything from market making strategies that trade in and out in seconds, or trend following strategies that track multiple asset classes and hold positions for weeks and months.
Trend trading strategies play with the old adage slightly, making the idea to “buy high, sell higher” (and vice versa). Trend trading strategies attempt to catch the “fat tails” in financial market returns, but suffer from large drawdowns during choppy markets, making them hard to stick with even though the strategy rules tend to be quite simple.
How to Choose the Right Trading Strategy for You
Ultimately, the purpose of every trading strategy is to make profits and minimize risks. However, it is critical to understand which trading strategy suits you, your personality, and your circumstances.
Let us look at the perfect strategy for the traders from difference walks of life.
For The Full-Time Office Worker
Individuals working full-time can find it challenging to keep track of every tick and piece of breaking news in the market. Considering that they have other commitments and have less time to dedicate to the screens, swing or position trading is the way to go.
Analysing the markets in the evenings or on weekends and modifying orders means they will have the rest of their time to focus on their career.
For The Gamer
Trading requires intense focus, and swift reaction speeds can be a huge advantage. Traders who love fast-paced gaming and are good at it might try their hand at scalping, day trading or news trading. Considering that these strategies require quick-fingered decision making under pressure, it can be a chance to put those years of gaming to good use.
For The Programmer
For individuals who like to code and would be interested in taking up the challenge of applying their analytics skills to the global financial markets, algorithmic trading is a good approach to choose. Crafting trading algorithms would mean the programmer is doing what they are good at, taking the difficulty of trading out of the picture and potentially even reducing cognitive biases.
Understanding Your Trading Strategy
Choosing a trading strategy can be tough for new traders, because it will define their approach to the market for a long time. This is why it is essential to understand the various factors which can influence your decision of which trading strategy to go with. Here are a few considerations:
The amount of time available to dedicate to analysing the markets and executing trades is vitally important when it comes to choosing a trading strategy. With a lot of time at hand, the trader can go for day trading, scalping or news trading. With less available time, the trader is limited to swing or positioning trading.
The cost of trading is also vital. If you want to day trade US stocks, capital requirements mean you will need $25,000 in your account, and that’s not including the cost of data. Whereas if you want to trade crypto, you can open an account with almost nothing and all the data will be free.
There can also be large differences between trading fees across asset classes and product types. Considering these and other costs are essential when choosing a trading strategy.
Trading in the financial market requires data to be studied and analyzed to make decisions. For some asset classes such as cryptocurrency, the data is widely accessible and free, while for some, a data provider might be required.
There are also differences in quality of data, with some data such as MBO offering extra insights in the market. Considering this factor is necessary to decide upon a trading strategy.
Welcome to the digital realm, where trading can be done through online platforms on your laptop or even phone. But if you If you are going to be day trading multiple assets, for instance, you will probably need a high-speed desktop computer with multiple monitors (some traders have over 10)! Whereas if you are swing or position trading, your laptop might be enough.
Thus, equipment is a critical consideration to bear in mind when choosing a trading strategy.
Risks and Other Considerations
All of the above considerations should all tie in with other factors, such as the amount of risk capital you have, your financial status, whether you will be holding positions overnight, and how much leverage you will use.
Bookmap was designed for traders, by traders, and is meant to help you win. Whatever strategy you choose, make sure it is based on solid order flow principles!
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