It could be argued that there are as many trading strategies as there are traders, with every trader having his own individual approach and minor factors that are particular to them. However, there are some broader approaches to trading which have become popular throughout the decades and centuries, and if you want to be successful at trading, you should certainly know about these different trading strategies. Probably more importantly, once you know about these different trading approaches, you need to decide the best trading strategy for you.
In this guide, we will look at:
Swing and Position Trading
Position trading is described as having a market view in the direction of the primary trend, on a short or intermediate-term timeframe, usually defined on the daily chart. There are numerous different trading approaches and tactics that can be used with position trading, but usually, this would involve holding positions or views in a market for at least a couple of days, but potentially for multiple weeks.
Swing trading is like position trading, but the swing trader would look to identify the swings in both directions within the primary trend. Swing trading is usually done on a short-term basis, as opposed to an intermediate- or longer-term timeframe. Typically, swing traders would hold views and positions in a market for maybe a couple of days, perhaps for 1-2 weeks. Both position and swing traders often use trading strategies, like trend trading, maybe counter-trend trading, plus momentum or breakout trading.
Day trading is simply trading within the day, therefore one of the key characteristics of a day trader is that they will open and close their open trading positions within the same trading day. This does not imply that day traders only trade once each day. In fact, most day traders have tactics where they buy and sell frequently throughout each trading day. A key feature of day trading is to be “flat” at the end of the day. This means the day traders have closed out of all open positions before the end of the trading day. Day traders often use technical analysis as a key tool, employing technical indicators like RSI, MACD, and the Stochastic Oscillator, to help identify market conditions and assist with trading decisions.
Price Action Trading
Price action trading is simply trading the price action, which is the various moves, changes and shifts in price over differing time frames. Price action traders identify how these price changes build into price trends or price patterns, then trade with the price action. First, though it is necessary to decide on the time frame that you want to trade on, then to identify which price action trading strategy you are going to use. Essentially, price action traders look for the dominant price action on their time frame, recognise the trend or the pattern that is dominant, then enter trades in the direction of the price action signal.
Algorithmic trading is a strategy where a set of commands are decided upon and entered into a computer model. It is an automated trading process that uses data such as price, time and maybe trading volume, plus complex formulas, and mathematical models. Algorithmic trading is a rules-based strategy, with the definition of the rules the critical input. The object being to produce signals to buy or to sell, when and at what price to enter a trade, when and where to take profit or to place a stop-loss. There is usually limited or no human interaction after the initial rules are defined by the algorithmic trader, though these rules are usually refined by the trader.
Event-driven trading relies on fundamental events that can impact any financial market. This might be corporate events such as earnings reports, or a larger macroeconomic, fundamental event that might impact any market. Event-driven traders first look to identify possible macroeconomic or corporate events that are scheduled such as economic data or earnings release. They then analyse the potential impact of these events, the likely trading consequences and then shape a strategy around the event. The aim is to profit from price changes before, during or after the event. You can learn more about The Importance of Key Economic Data in our article here.
Which Trading Strategy Is Best for You?
There are several factors to consider when deciding on what trading strategy suits you best. These include:
- Your individual psychology and make up
- Your trading aims and goals
- The time you can devote to trading
- What “feels” right
Your personal psychology and background: It would be useful to first look at what you do and as important what you don’t bring as an individual to trading, from a psychological and personal perspective. For example, if you do not have strong computing skills then algorithmic trading is not for you. If you do have a strong analytical brain, then event-driven trading may be a good choice for you. If looking at charts to make decisions comes naturally to you, then perhaps swing or position trading, even day trading, would be a good fit for you.
What are your trading goals? Ask yourself, are you looking to trade full time and trading your primary source of income? If the answer is yes, then you would maybe need to look at short-term trading such as day trading. But if you are looking to make top-up income, position or swing trading might be a better fit.
How much time can you give to trading? If you cannot follow markets closely throughout the day, then you cannot be a day trader. If you can give limited time each day to analyse markets and place orders, then maybe position or swing trading is a good fit.
What “feels” right to you? Try out different trading strategies using a demo account, to determine which approach suits you and what strategy is profitable.
Trading Strategy Summary
|Trading Strategy Type||Time Span||Trading Time Period|
|Swing and Position Trading||Short/intermediate term||days, weeks|
|Day Trading||Short-term||minutes, hours|
|Price Action Trading||Short/intermediate term||minutes, hours, days, weeks|
|Algorithmic Trading||Very short-term (usually)||seconds, minutes|
|Event-Driven Trading||Very short-term/ short-term||seconds, minutes, hours|