Knowledge Series XI : Guide to Trading Strategies

There will always be different ideas about how often to trade, how long to hold a position and when to enter or exit the market. Form of trading will be unique to individual trader. On broader way, there are four patterns generally a trader trades in the market.

Trading Style
Time Frame
Positional Trading
Weeks to Months
Swing Trading
Days to Weeks
Day Trading
Intraday
Jobbing
Seconds to Minutes

For all above trading styles, we have shortlisted some of the popular strategies: 

1. Trend Trading
2. Range Trading
3. Breakout Trading
4. Reversal Trading

1.Trend Trading

This strategy relies on using technical analysis to identify the direction of market momentum. This is usually considered a medium-term strategy, best suited to positional traders or swing traders, as each position will remain open for as long as the trend continues.

The price of an asset can trend both up and down. If you were going to take a long position, you’d do so when you believe the market is going to reach higher highs. If you were going to take a short position, you’d do so if you think the market would reach lower lows.

Some of the most popular technical analysis tools included in trend-following strategies are 

Moving Averages

Relative Strength Index (RSI)

Average Directional Index (ADX)

  1. Range Trading

    Range trading is a strategy that seeks to take advantage of consolidating markets (the term to describe a market price that remains within lines of support and resistance). While trend traders focus on the overall trend, range traders will focus on the short-term oscillations in price. They will open positions when the price is moving between two clear levels and is not breaking above or below either.

There are a range of other indicators that range traders will use, such as the Stochastic Oscillator or Relative Strength Index (RSI), which identify overbought and oversold signals. Range traders will also use tools, such as the Bollinger bands, to identify when the market price might break from this range indicating it is time to close the position.

  1. Breakout Trading

    Breakout trading is commonly used by day traders and swing traders, as it takes advantage of short to medium-term market movements. Traders who use this strategy will look for price points that indicate the start of a period of volatility or a change in market sentiment – by entering the market at the correct level. It is common to place a limit-entry order around the levels of support or resistance, so that any breakout executes a trade automatically.

Most breakout trading strategies are based on volume levels, as the theory assumes that when volume levels start to increase, there will soon be a breakout from a support or resistance level. As such, popular indicators include the Money Flow Index (MFI), On-balance Volume and the volume-weighted average price (VWAP).

  1. Reversal trading

    A reversal can occur 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. While a ‘bearish reversal’ indicates that the market is at the top of an uptrend and will likely become a downtrend. When trading reversals, it is important to make sure that the market is not simply retracing. The Fibonacci retracement is a common tool used in this pattern of trading.

Wrapping Up :

It is important to combine technical analysis indicators with other forms of analysis, whether this is other technical tools , economical trend or fundamental analysis.

Above mentioned strategies represents general perception about traders, results may vary as per specific trading objective. A trader should always execute trades bases on their own risk parameters.

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