Stock trading strategies traders should know

 Stock trading strategies traders should know

Serious business man trader analyst looking at computer monitor, investor broker analyzing indexes, financial chart trading online investment data on cryptocurrency stock market graph on pc screen.

When trading in the financial markets, traders will encounter several popular trading strategies. That said, it is still up to traders to pick which is the best trading strategy for their needs. Some important factors to consider include personality type, lifestyle, and available resources. In this article, we present a few of the most common trading strategies that may encourage you to build your own. Keep reading below to learn more.

What is stock trading?

Stock trading entails buying and holding stocks for a short period of time in order to potentially turn around a quick and significant profit. Traders typically aim to take advantage of short-term pricing fluctuations in the market when they buy stocks.

Trading can be contrasted with investing, which is the approach to the stock market that aims to gradually build wealth by holding assets over a long period of time. Whereas investors tend to buy stocks and hold them for many years, traders generally only hold them for an hour, a day, a week, or a few months.

There are two main types of stock trading – active and passive. Active trading is a highly technical approach with the goal of taking advantage of short-term price movements. Whereas passive trading focuses more on the stock’s long-term trends, rather than short-term fluctuations or market news.

Scalping

Scalping involves taking advantage of small price movements in a security. Scalpers generally hold a trading position for a very short period of time, ranging from a few seconds to a few minutes. As a result, they aim to generate potential gains from these small price fluctuations.

Traders who use the scalping approach have to consider the transaction fees and the bid-ask spreads. Because of the frequency of the trades that the scalper has to make, these costs can considerably rise if not managed correctly. Additionally, scalping requires quick decision-making, focus and discipline as scalpers must be able to enter and exit positions quickly in order to take advantage of small price movements.

Day trading

As its name suggests, day trading is a short-term trading strategy where securities are bought and sold within the same trading day. Day traders aim to take advantage of price movements in a security and typically close all of their positions by the end of a market trading day, meaning there is no overnight risk.

The general public often associates day trading with individual investors who usually work from home or in a small office and mainly use their own capital to trade securities. However, nowadays, day traders also work for large financial institutions such as banks, brokerage firms and hedge funds.

Swing trading

This approach involves buying and holding securities for a short period of time, usually from a few days to a few months. The goal of swing trading is to gain from short-term price movements in the market, buying when prices are low and then selling when prices are high again.

Swing traders have to manage sudden and unexpected moves in the market which can lead to losses. Traders have to stay informed about market trends and news. Additionally, swing traders also need to have strong risk management skills and discipline to stick to their trading plan and avoid emotional trading decisions that could prove detrimental in the long run.

Position trading

This approach entails holding a position in securities for an extended period, usually from several months to years or even decades. The objective of position trading is to take advantage of major trends in the market rather than short-term price movements. On the whole, position trading is less active than scalping, day trading and swing trading. Institutions usually allocate a portion of their trading book to this specific approach.

Generally, position traders use fundamental analysis to identify securities that are undervalued or overvalued and hold these positions for the long term, waiting for the market to correct itself. Position traders may also use technical analysis to identify optimal entry and exit points.

News trading

A news trading strategy involves trading based on the news and market expectations, both before and after news releases. Trading on news announcements can require a skilled mindset as news can travel very quickly via digital media. Traders will also need to assess the news immediately after it has been released and make a quick judgement on how to trade their assets. Some key considerations a trader may ask themselves include whether the news is already fully factored into the price of an instrument or only partially priced in, or whether the news matches market expectations. By understanding these differences in market expectations, traders will be more likely to find success in a news trading strategy.

Trend trading

This strategy refers to when a trader uses technical analysis to define a trend and only enters trades in the direction of the pre-determined 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 determine and then follow trends. That said, it is still important that traders stay alert and adaptable, and trends can quickly change. As such, trend traders need to be aware of the risks of market reversals, which can be mitigated by a trailing stop-loss order.

End-of-day trading

The end-of-day trading strategy involves trading near the close of markets. End-of-day traders become active when it becomes clear that the price is going to settle or close. This strategy requires the studying of price action in comparison to the previous day’s price movements. End-of-day traders can then speculate on how the price could move based on the price action and decide on any indicators they are using in the system. Traders should make sure to create a set of risk management orders including a limit order, a stop-loss order, and a take-profit order to reduce any overnight risk.

This particular style of trading requires less time commitment than other trading strategies. This is because there is only a need to study charts at their opening and closing times.

Reversal trading

The reversal trading strategy is based on identifying when a current trend is going to change direction. Once the reversal has happened, the strategy will take on similar characteristics as a trend trading strategy, as it can last for varying amounts of time.

A reversal can happen in both directions, as it is simply a turning point in market sentiment. A bullish reversal indicates that the market is at the bottom of a downtrend and will soon turn into an uptrend. On the other hand, a bearish reversal indicates that the market is at the top of an uptrend and will likely become a downtrend.

Gap trading

A gap occurs when there is no trading activity that is taking place. This happens when an asset’s price moves sharply high or low with nothing in between, which implies the market has opened at a different price to its previous close. An opening range that rises above the previous day’s close is a gap that usually signifies going long, while an opening range that is below the previous day’s close signifies an opportunity to go short.

Bottom line

When it comes to trading strategies, they can all perform well under specific market conditions. However, what is considered the best trading strategy remains a subjective matter. That said, it is still recommended to pick a trading strategy based on your personality type, level of discipline, available capital, risk tolerance and availability. Before trading for real, traders can practice their strategies using a demo account, which should be provided by most brokerage firms.

Cheryl D. Duke

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