What is Trading Strategy
A trading strategy is a predefined system with a clear set of parameters that is used to generate trading decisions, whether to buy or sell in the markets and when or what price to enter and exit the trades. Based on either technical and/or fundamental analysis.
Why do you need trading strategy?
To be profitable in the long run, you need to be consistent and be disciplined. Easiest way to ensure that, is by having a trading strategy. Trading strategies would eliminate biases, doubts or fear especially when markets are going against you. In other words, it would rein in on your emotions. For example, traders following a set of rules dictating when to exit a losing trade would be less likely to hold on to that trade hoping that prices would come back in favour of his positions.
Forex trading strategies are essential when you are looking to capitalize on frequent price movements, big or small.
3 Elements of Trading Strategies
Online Trading Systems
MONEY MANAGEMENT
This element covers how much money is going to be allocated for this investment, how big your trade size is going to be, what sort of risk-reward ratio are you looking for, and your risk profile
RISK MANAGEMENT
Always manage risks, always stop losses. Before you start your trading/investing journey, you need to decide how much risk you are willing to take on. Decide how much % of the capital is going to be risked on each trade. Nothing is guaranteed 100%. So you need to prepare yourself for some losses. Limit your losses or you would lose more than you can afford to and be out of the game soon.
TRADING SYSTEM
The basis of all your trade executions. This should reflect your investing objectives, risk tolerance, and time horizon. Once executed, trading positions are monitored and managed, including adjusting or closing them as needed. Be disciplined!
Active Trading Vs Passive Trading
ACTIVE TRADING
Active trading is the act of actively buying and selling instruments such as forex or CFD, based on short-term price movements in order to maximize profit and returns on investment. Active traders believe that short-term price fluctuations are where the profits are made.
PASSIVE TRADING
Passive trading is a strategy employed to maximize profit and returns on investment by minimizing buying and selling actions. Passive traders believe that too active trading would result in high cost of trading such as commissions which would reduce profitability. ETF Index investing is one common passive trading strategy whereby investors purchase ETF index, such as the S&P 500 index, and hold it over a long period of time. This is essentially a buy-and-hold strategy. Passive traders do not seek to profit from short-term price fluctuations.
Types of Active Trading Strategies
Learning How to Trade Forex
Forex Trading Strategies
DAY TRADING
Strategy to buy and sell financial instruments within the same day. No positions are held overnight. All positions are closed at the end of trading day. Utilises only short term charts
SWING TRADING
This system needs price to move in a certain direction. It involves identifying the trend and trading within it. Swing traders use technical analysis and charts which display price actions, helping them locate best points of entry and exit for profitable trades. Main tools used by this system are price actions, support and resistance, and Fibonacci extensions. Occasionally combined with other patterns and technical indicators. It is essentially a trend trading.
SCALPING
One of the most popular strategies in the forex market. it looks to capitalize on minute price changes. Fast paced trading strategies but can be risky. This will take profit as soon as the trade is profitable. When it is losing, you need to close out losing trade as soon as possible, otherwise you might hold losing position much longer than you intended to before finally closing out the position. This type of strategy requires high trading probability and volatile markets. Since profits per trade are small, scalpers carry out numerous trades to build profit. High commissions tend to reduce profit with frequent buying and selling. Scalping is for those who can handle stress, make quick decisions, and act accordingly.
QUANTITATIVE TRADING
Based on quantitative analysis. it uses information that is considerably larger than your standard technical analysis. This type of trading system requires and uses multiple data points at the same time and in real time. It aims to exploit market’s inefficiencies and profit from it. Generally used by financial institutions, investment banks and hedge funds. The transactions are usually large and may involve the purchase and sale of hundreds of thousands of financial instruments.
