When trading on financial markets, whether it be forex, a stock market index, or a share, you will encounter several popular trading strategies. Financial trading experts at CMC Markets have revealed a guide to these trading strategies highlighting their benefits and drawbacks.
1. News trading strategy
A news trading strategy involves trading based on news and market expectations, both before and following news releases. Traders will need to assess the news immediately after it’s released and make a quick judgement on how to trade it. Understanding these differences in market expectations is crucial to success when using a news trading strategy.
Benefits of news trading:
• The ability to define an entry and exit strategy. Entering and exiting a trade is based on how both the market and individual trader interpret the news, which is commonly outlined in a trader’s plan.
• Many trade opportunities. Every day, there are several news events and economic releases that can provide trading opportunities.
Drawbacks of news trading:
• Overnight risk. Depending on the type of news, trading positions may be open over several days. Any positions that are left open overnight incur overnight risk, such as news impacting the price of the stock.
• News trading requires expert skills. News traders need to understand how certain announcements will affect their positions and the wider financial market. Additionally, they need to understand news from a market perspective and not only subjectively.
2. EOD trading strategy
The end-of-day (EOD) trading strategy involves trading near the close of markets. EOD traders become active when it appears likely that the price is going to ‘settle’ or close.
This strategy requires the study of price action in comparison to the previous day’s price movements. EOD traders can then speculate how the price could move based on the price action and decide on any indicators that they are using in their system.
Benefits of EOD trading:
• It’s suitable for most traders. EOD trading can be a good way to start trading, as there is no need to enter multiple positions.
• Less time commitment. Traders can analyse charts and place market orders either in the morning or at night, so it can be significantly less time-consuming in comparison to other strategies.
Drawbacks of EOD trading:
• Overnight risk. Overnight positions can incur more risks, but this can be mitigated if you place a stop loss order. Guaranteed stop-losses are even more useful to mitigate risks.
3. Swing trading strategy
The term ‘swing trading’ refers to trading both sides on the movements of any financial market. Swing traders aim to ‘buy’ security when they suspect the market will rise. Otherwise, they can ‘sell’ an asset when they suspect that the price will fall. Swing traders take advantage of the market’s oscillations as the price swings back and forth, from an overbought to an oversold state.
Benefits of swing trading:
• It’s viable as a hobby. Swing trading can be more suitable for people with limited time in comparison to other trading strategies. However, it does require some research to understand how oscillation patterns work.
• Many trade opportunities. Swing trading involves trading ‘both sides’ of the market, so traders can go long and short across a number of securities.
Drawbacks of swing trading:
• Overnight risk. Some trades will be held overnight, incurring additional risks, but this can be mitigated by placing a stop-loss order on your positions.
• Requires ample research. A lot of research is required to understand how to analyse markets, as technical analysis is comprised of a wide variety of technical indicators and patterns.
4. Day trading strategy
Intraday trading is suitable for traders that would like to actively trade in the daytime, generally as a full-time profession. They take advantage of price fluctuations in-between the market open and close hours, often holding multiple positions, but do not leave positions open overnight in order to minimise the risk of overnight market volatility. It’s recommended that these types of traders follow an organised trading plan that can quickly adapt to fast market movements.
Benefits of day trading:
• There is no overnight risk. By definition, the strategy requires no trade is left open overnight.
• Limited risk. A trader only opens short-term trades that usually last around 1 to 4 hours, which helps to minimise the likelihood of risks that may exist in longer-term trades.
Drawbacks of day trading:
• It requires discipline. Traders should utilise a pre-determined strategy, complete with entry and exit levels, to help manage their risk.
• Flat trades. This is when some positions do not move within the time period, which is to be expected.
5. Trend trading strategy
This strategy describes when a trader uses technical analysis to define a trend, and only enters trades in the direction of the predetermined trend. Trend traders do not have a fixed view of where the market should go or in which direction. Success in trend trading can be defined by having an accurate system to first determine and then follow trends. However, it’s crucial to stay alert and adaptable as the trend can quickly change.
Benefits of trend trading:
• It’s a useful hobby. Trend trading is suitable for people with limited time, after their trend identification system has been created.
• Many trade opportunities. A prevailing trend may offer various opportunities to enter and exit a trade.
Drawbacks of trend trading:
• Overnight risk. Trend trades are often open over several days so they may incur more overnight risks than other strategies.
6. Scalping trading strategy
Traders who use a scalping strategy place very short-term trades with small price movements. Scalpers aim to ‘scalp’ a small profit from each trade in the hope that all the small profits accumulate. As a scalper, you must have a disciplined exit strategy as a large loss can eliminate many other profits that have accumulated slow and steadily.
Benefits of scalping:
• It’s suitable as a hobby. Scalping is suitable for people who want to trade flexibly.
• Many trading opportunities. Scalpers open several small positions with a less defined criterion in comparison to other strategies, therefore there a lot of opportunities to trade on.
Drawbacks of scalping:
• Limited market applicability. Scalping only works in particular markets such as indices, bonds and some US equities. Scalping requires very high volatility and trading volumes to be worthwhile.
• Requires discipline. As scalping requires larger position sizes than other trading styles, traders need to be extremely disciplined.
7. Position trading strategy
Position trading is a popular trading strategy where a trader holds a position for a long period of time, usually months or years, ignoring minor price fluctuations in favour of profiting from long-term trends. Position traders tend to use fundamental analysis to evaluate potential price trends within the markets, but also take into consideration other factors such as market trends and historical patterns.
Benefits of position trading:
• High-profit potential. Position trading allows traders to use high leverage, as the possibility of a mistake is smaller than in conventional trading.
• Less stress. One of the biggest advantages of position trading is that positions do not have to be checked daily.
Drawbacks of position trading:
• Potential for significant loss. Position traders tend to ignore minor fluctuations that can become full trend reversals and result in significant losses.
• Swap. The swap is a commission paid to the broker. If the position is open for a long period of time, the swaps can accumulate a large amount.
What is the best trading strategy?
When it comes to trading strategies, they can all perform well under specific market conditions; the best trading strategy is a subjective matter. However, it is recommended to pick a trading strategy based on your personality type, level of discipline, available capital, risk tolerance and availability.