The main issue related to trading financial markets is choosing particular trading strategy. It is this part of trading which influence deeply beginning traders, it determines them to decide whether it is worth to deal with the markets or maybe to avoid them at any price. However, experienced traders realize that profitable investment strategies on stocks are important only if they match trader’s individual trading style. This is dependent on time frame chosen by trader, which he will in mind during his investment adventure.
When choosing proper time frame we are of course not obligated to sign a pact with the market what will make impossible to change our decision. We can always change our mind about chosen style and decide to change our behaviour. However it is important to remember – like in any other field of life – not to overdo it. In example not to change system for one which will put us in overtrading state where we open position too often. There are many traps for the traders on the markets and a large percentage of the are consequences of pursued trading strategy.
Trading strategies – strategy classification according to accepted canon
Investment strategy is the overall activities connected with opening position and keeping them, including closing them. Investment strategies are connected with specific time frame. This is why main investment styles were detailed with specific time frame. Each of the trading strategies works properly only in some market conditions. This is why it is so important to clarify which investment style is the best for us so we can define this style later as our own. The trading style determines which investment strategies will be suitable for us and which Forex strategie will be totally unnecessary and we will reject them.
Trading style – day trading
The basic trading style which inspires traders is so called day trading. This style is the most convincing for all participants of leveraged markets, which are these using on daily basis financial leverage. That financial leverage causes that even smallest moves on specific instruments can change significantly equity of our account. Whole daytrading concept involves opening positions which will last shorter than one session day. In case of Forex market our transaction cannot last longer than until 11:59 PM. Thanks to that trader is secured from price gaps between sessions and counting negative swap.
Day trading is a perfect trading strategy for anyone who has ability to track charts for almost whole day. In addition, this style requires from us perfect discipline and consistency in actions. In this style you have to take actions quickly and cut losses immediately. Of course it is not a style without cons. The main one is the need to constantly sitting in front of your screen and this trading style organizes our daily routine. This is why we should decide to use this trading style only when we have enough time which will let us to analyze the market and open positions. It requires from us choosing only liquid markets and instruments. In other case this style would be totally useless because on of the main assumptions is the possibility to exit opened position as fast as possible.
Investment style – swing trading
Another style which aims for trading in short term is swing trading. However in this case short time means that it lasts from few to more than a dozen session days. In this style main criteria to open position is technical analysis. The aim of the traders is to look for instrument with short term growth potential. The name itself of this style comes from tries to catch the swing from one extremum to the other. In this market approach very important are any kind of patterns which predict end of trend and those which assume its termination. Analyze of the trend on higher time frame is also important here. This is due to the fact that according to Dow theory trend lasts much longer than anyone would think.
All those who want to make trading a full-time job but for various reasons cannot do it, may be interested with a swing approach. Swing trading requires from us far less time commitment than mentioned above daytrading. Therefore, the speculator can simultaneously reconcile market analysis with full-time work or making business. Opening position with perspective of keeping it for at least few days let using slightly higher time frame. Opening position on H1 or H4 chart let to manage position in pair with other work related duties. At the same time we have to remember that there are many risks connected with price gaps both between sessions (in case of stock market) and also weekend gaps on Forex market.
Position trading – perfect style for investors
For those who look on the markets in longer perspective position trading is targeted, which is an approach in which trader opens position thinking about next weeks, months and sometimes even years. In this style, not like in the ones before, priority is fundamental approach to the markets. This is why when making decision trader decides to buy undervalued securities or sell overvalued ones. The idea of position trading is based on using maximum of the current trend. Investor spends little time for the analysis and for keeping certain transaction. People using this approach often say that money is working or them. With so low frequency of made decisions we can say that their decisions come down to a choice of just few ‘pearls’ in which then they invest their capital. It is an investment style which needs the lowest financial leverage and smallest attention of the trader.
The basic advantage of this approach is the fact that if you have other duties than trading, you do not have to sacrifice anything to reconcile these things with trading. The time needed to analyze market is nothing compared to the time of position expiration. I addition there are some profits of long term trading which are described below in the explanation of carry trading. Using smaller leverage investor must know that higher amount of capital is needed. Another often missed risk is so called entering position risk which after some time becomes totally forgotten. On the stock market it is called “buy and forget risk“. If traders decides to use long term approach to the market he should remember that in case of keeping position which is losing it can harm his mind. Besides that one of the most obvious disadvantages is the lack of contact with market what can translate to lack of justification to keep certain positions. It is due to fact that if you are not analyzing the markets too often then transactions which should be closed long time ago are still opened.
The styles above determine strategy division due to duration of orders criteria. Trading strategies created for day trading and used in daytrading should stay this way. A lot of beginning traders make this fundamental error and failed daytrading transaction they transform into position trading believing that market will reverse and they will at least hit break even. Do not make these mistakes and use investment strategies in line with their purpose and stick tight to the money and risk management rules.
Which trading strategies choose?
Trading strategies we can divide for those which generate signal in one minute time frame and also those which give signal once a few days. This is why important is to choose a particular investment style to identify which investment strategies are more applicable and which should be rejected by speculant. Trader who use swing trading style must reject all those trading strategies which generate few signals a day. If his choice of investment style is determined by the fact of working full-time and most of the time during the day he is obligated to sacrifice on professional issues, he cannot afford to trade on small time frames. This is why the choice of proper trading strategy is not dictated by its return but mostly predispositions of the trader who will use it.
Investment strategy both on stocks and Forex markets must be effective. Despite obvious nature of the previous sentence, traders’ actions not always go in pair with the above. No matter which approach we decide to use on the market, we need to know all disadvantages and advantages of particular investment strategy. If specific approach is more reasonable for us, then Forex trading strategy found must be subjected to numerous tests in different market conditions and different instruments. The exception is a Forex strategy created with only one instrument in mind (GBP etc.).
Only investment strategies with positive returns are worth considering. Trader must be able to characterize specific approach. It means that he should be able to describe market conditions of this Forex strategy and which instruments are the best to use it. Then investor has full image of pros and cons of this trading strategy thanks to which he can easier manage both the risk and his capital. Below there are descriptions of two most popular market strategies used by Forex traders.
Scalping – one of the best Forex trading strategies
Scalping is a strategy which is the most popular among Forex market daytraders. On various strategies forums day trading forum threads are full of strategies called scalping. Scalping is to obtain profit from small price movements. Generally, close of the position comes in short time after opening. The target of the trader in this Forex trading strategy is to earn small profits from every transaction. Investor opens quite a large number of positions from which he earns small profits, total result of all of them is satisfactory to him. This Forex trading strategy requires iron discipline from the trader in fear of bigger loss will cost him all earned profits.
Forex carry trading – ideal strategy for Forex investors
Completely different strategy is carry trading. It is an investment strategy which should be classified as long term or position trading. Carry trade relies on earning in longer perspective on the market, using disparity of interest rates. The simplest definition is comparing two countries and their interest rates. When you find two currencies with huge disparity, which means that one currency has higher interest rates than the other, we can count on the difference between those interest rates. In the end swap is a fee for interest rates disparity.
In case of opening position suggesting appreciation of currency with higher rates, we will have positive swap, which will be counted in the end of the day. The amount of swap is depending on the current interest rates and broker’s offer. It is very profitable strategy in case of currencies with high interest rates, which are in bullish trend. It lets to generate much more income which is not only dependent on the currency pair price but also on the duration of the transaction. In case of currencies which are decreasing no swap will compensate the losses on it. This is why the basic criteria is current trend with confirmation of opening transaction resulting from fundamental analysis. More information about carry trade strategy you will find soon.
Trading and investment strategies
When choosing trading strategy we should be sure that we have enough time letting us to trade optimally using it. If we only open every second transaction it may show up that we are missing profitable ones and we open those which are losing. We need to remember that investment strategy which brought satisfying profits in the past does not guarantee success. It is all because of market conditions which decide about success of our system. Even with strategy which gave us regular profits for few weeks we should be aware to constant watching this trading system.