Trading strategies explained: 4 strategies you should understand

This guide explains the four most common trading strategies that you should understand before you start to invest in trading.

If we start from the basics, a person’s economic future is determined by the money he or she earns, the percentage he or she saves of the money he earns, and how he invests the money he or she saves. While the three points are important, most of society focuses on the first without bearing in mind that the other two would allow you to safely and periodically accumulate wealth.

Among some of the investment options that any citizen can access is the stock market (one of the best options), buying real estate, fixed income and some people are inclined to accumulate objects or works of art. But if investing in the stock market is much easier than you think and it has been proven that, in the long run, it is the most profitable way… how can you start trading in the stock market if you are a beginner?

For someone who has never invested in stocks of any kind before, it can be a little overwhelming, given the amount of information, the technical terms and perhaps also the uncertainty in taking risks. The investment alternatives offered by the stock market are endless, within its main functions we can highlight the purchase and sale of shares, bonds, foreign currencies and even cryptocurrencies. However, you need to understand the basics of trading strategies before you dive in.

Trading in stocks, bonds, and other forms of securities is one of the most effective ways of investing your savings. It not only provides you with a way to earn money, but also offers a reliable method of diversifying your investments in order to reduce your risk exposure.

More women are turning towards trading as a way to develop a second income stream, and one that they can do from home – or anywhere they wish – while the business world is still grappling to come to terms with remote working. Of course, it is also attractive to women who already work at, or from, home while they are raising their children.

4 key trading strategies explained

The first step towards investing is to get a good online trading account. After that, you then have to figure out which trading strategy you are going to use. You can opt for either a long term or a short term strategy, and could consider some of the top 4 stock market strategies: day trading, position trading, swing trading, and scalping. But what do those terms mean? We explain below.

Day trading strategies

As a day trader, you will be looking to make a profit by taking advantage of changes that happen during the day. Essentially, you will be buying stocks and other securities at a lower price, and then selling them off within the same day.

To be able to effectively beat the market as a day trader, you need to be highly informed with your trading strategies. This is because shifts in security prices tend to be subject to daily events. Being aware of what happens in the world, how the news will affect given stocks, and how best to immediately take advantage of any changes that occur as a result will be the key to your success.

Position trading

Unlike day trading, position trading does not involve closing out your positions within the same day. With these types of trading strategies, you will base your decision of opening and closing your positions based on a period that is longer than the second-by-second changes that a day trader is subject to.

Therefore, you will take a position based on long term data analysis and trends, and then hold that position for as long as a given trend holds. When compared to day trading, this is a relatively long-term strategy as it may take a couple of days or even weeks for you to close out your positions.

Swing trading strategies

If you don’t want to play the game of holding throughout trends, you can become a swing trader. What this means is that instead of holding a position throughout a trend and waiting for it to break, you will take your position after the trend has broken. Swing trading strategies will allow you to take advantage of all the volatility that takes place immediately after such a break. You will execute your trades while the price of the securities are trying to settle into the next trade.

As a swing trader, you won’t have to hold your positions as long as position traders do. However,  you may have to hold your position for longer than a day, which means that the holding period is normally longer than that of a day trader.

Scalping

Scalping is another of the trading strategies that you can use to increase your earnings over a short period of time. With this strategy, all you will do will be to look for differences between the ask prices and the bid prices of securities. Once you find these differences, you will then execute your trades with the aim of buying at the lower price (bid price) and selling at a higher price (ask price). The difference between the two prices will be your profit.

Generally, you will hold your position for shorter periods of time. This is because holding them for an extended period is riskier since the longer you wait, the more likely the chances of the difference eroding. Therefore, you will make money by regularly trading small volumes of securities that have price gaps.

When employing trading strategies that are designed to give you short term rewards, it is important to consider the costs of making a given trade. The fees associated with trading can erode potentially profitable opportunities. Being aware of these costs, in addition to any tax implications of your trades, will help to ensure that your investment grows steadily.