Top 9 Trading Strategies a Trader Should Know

Trading strategies vary depending on traders' preferences and aims. If you want to start trading the right way, without getting lost in the unpredictable atmosphere of trading, you need to decide on your trading strategy.

In this article, we're going to go through the nine top trading strategies.

Day Trading

Day trading, also known as intraday trading, relies on short-term price movements. Day traders open and close positions within the same trading day, so the positions don't get carried over the next day.

It is one of the best trading strategies for traders who like to keep a close eye on the markets actively throughout the day.

Advantages of day trading

• Day traders can take advantage of short-term price movements to earn profits quickly, often within the same trading day.
• By closing all positions before the market closes, day traders avoid the risks associated with holding positions overnight, such as unexpected market movements or news events.
• Day traders can choose their trading hours, allowing for greater flexibility and ability.
• The high frequency of trades offers ample learning opportunities, helping traders to gain experience and improve their skills rapidly.

Disadvantages of day trading

• Frequent trading can lead to high transaction costs, including commissions and spreads, which can eat into profits.
• The fast-paced nature of day trading can lead to emotional stress and pressure, which may affect decision-making.
• The potential for frequent trading can lead to overtrading, where traders open and close too many positions, which may increase losses.

Swing Trading

Swing trading is a strategy that requires holding a position a bit longer, such as a few days or weeks. In swing trading, traders aim to catch the swings or price changes during strong trends. Swing traders are also known as trend-following traders.

Advantages of swing trading

• Swing trading does not require constant monitoring of the markets, making it less time-intensive compared to day trading.
• Holding positions for a few days to weeks allows traders to capitalize on larger price movements and trends.
• Swing traders can use technical analysis to identify trends and entry/exit points, simplifying the decision-making process.
• Fewer trades mean lower transaction costs, such as commissions and spreads, compared to high-frequency trading.
• Swing trading can be combined with other trading strategies for a diversified approach. For example, it can be integrated with trend trading to follow long-term market trends, or with position trading to hold positions based on fundamental analysis while still taking advantage of medium-term price swings.

Disadvantages of swing trading

• Holding positions overnight and over weekends exposes traders to some market risks.
• Successful swing trading requires thorough technical and fundamental analysis to identify trends and potential reversals.
• Holding positions for longer periods can lead to emotional stress, especially during periods of market volatility.
• Swing trading often involves maintaining margin requirements.

Position Trading

Position trading is a long-term strategy. Position traders hold positions for weeks, months, or even years based on fundamental analysis. Following market trends and historical patterns become more important.

Advantages of position trading

• Position trading requires less frequent monitoring and fewer transactions
• The long-term nature of position trading reduces the pressure of daily market fluctuations, making it a less stressful approach.
• Fewer trades mean lower transaction costs, such as commissions and spreads.
• The long-term perspective helps traders avoid emotional swings.
• This strategy relies on fundamental analysis, which can lead to higher and long-term profits.

Disadvantages of position trading

• Holding positions for extended periods exposes traders to prolonged market volatility.
• A sudden reversal in market trends can lead to significant losses.
• Long-term positions may incur higher swap rates or overnight financing fees.
• Funds are committed to positions for an extended time, reducing liquidity and the ability to react to new opportunities.

Scalping

Scalpers aim to profit from small price changes in a very small amount of time. Traders using this strategy often target minimal profit margins in a high-frequency trading environment. On the other hand, a scalper must have a solid exit strategy

Advantages of scalping

• Scalping allows traders to earn quick profits by capitalizing on small price changes.
• Scalpers can execute numerous trades within a short period,
• By closing all positions before the end of the trading day, scalpers avoid the risks of holding positions overnight.
• It usually involves trading highly liquid markets, which ensures quick execution of trades.

Disadvantages of scalping

• Scalping requires high attention and the ability to make rapid decisions, which can be stressful.
• Frequent trading leads to high transaction costs, such as commissions and spreads.
• Broker and platform related technical issues or delays in transactions can affect the performance negatively.
• The small profit margins per trade mean that overall profitability relies on the volume of successful trades.

Momentum Trading

Traders using the momentum trading strategy follow trends and enter positions as assets gain momentum in value, and exit as soon as they start dropping.

Advantages of momentum trading

• Momentum trading allows traders to take advantage of ongoing market trends.
• By entering positions as assets gain momentum, traders can achieve significant returns.
• This strategy can be effectively applied across various markets and asset classes. Traders can apply their strategies in different market conditions, including bullish, bearish, and sideways markets.
• Momentum indicators can provide clear signals for entering and exiting trades.

Disadvantages of momentum trading

• Identifying the correct entry and exit points can be challenging
• Momentum trades are vulnerable to sudden market reversals
• Traders need to continuously monitor the market to identify momentum shifts and act quickly.
• Frequent trading can result in high transaction costs
• Technical indicators used in momentum trading can sometimes produce false signals.

Range Trading

Range trading is a strategy that involves understanding and capitalizing on price movements within a specific range, defined by support and resistance levels. Traders using this strategy aim to buy at the support level and sell at the resistance level, profiting from the oscillations within this range.

Advantages of range trading

• Range trading is most effective in stable, sideways markets where prices oscillate within a defined range.
• Well-defined support and resistance levels provide clear signals for when to enter and exit trades.
• Since it relies more on technical levels than fundamental news, traders can avoid the noise of market news to some extent.
• Range trading can be applied to various timeframes, from short-term intraday trades to longer-term swing trades.

Disadvantages of range trading

• Successful range trading relies heavily on accurate technical analysis to identify support and resistance levels
• In highly volatile markets, prices often break through support and resistance levels, limiting the effectiveness and profit potential.
• There is always a risk of false breakouts
• Range trading is less effective in trending markets where prices move consistently in one direction.

Trend Trading

Trend trading involves trading in the direction of market trends. Trend traders follow the prevailing market trends by going long in uptrends and short in downtrends. It's usually considered as a medium-term strategy.

Advantages of trend trading

• Trend trading allows traders to capitalize on significant market movements, leading to substantial profits.
• This strategy relies on technical indicators and market analysis, providing clear signals for entering and exiting trades.
• Following trends reduces the need for constant decision-making, leading to a more systematic approach to trading.

Disadvantages of trend trading

• Trends can reverse easily, leading to losses for traders who are not prepared for such changes.
• It can be challenging to predict when a trend will start or end, making it difficult to time entries and exits perfectly.
• Short-term fluctuations and market noise can lead to false signals, making it challenging to identify true trends.
• Holding positions for an extended period can result in higher transaction costs, including overnight financing fees.

News Trading

News trading is a short-term strategy used by traders who leverage breaking news and economic trends to make quick trading decisions. News moves around quickly, that's why traders need to follow them and develop a strategy.

Advantages of news trading

• Major news events, such as economic reports and geopolitical developments, can lead to price movements and high profits.
• Traders can take advantage of immediate price changes following news releases.
• News traders can use economic indicators and reports to inform their trading decisions and predict future market movements.

Disadvantages of news trading

• High volatility associated with news events can result in unpredictable price swings.
• Incorrect timing or reliance on inaccurate information can lead to poor trading decisions.
• News traders need to continuously monitor news sources and market reactions, which can be time-consuming and stressful.
• Traders must rely on the accuracy and timeliness of their news sources, which can sometimes be fake.
• Frequent trading can lead to additional transaction costs.

Algorithmic Trading

Automated or algorithmic trading involves using computer programs to execute trades based on pre-defined criteria. Using this trading technique can save traders from decision processes.

Advantages of algorithmic trading

• Algorithmic trading systems can execute trades in milliseconds, ensuring rapid responses to market conditions.
• By automating the trading process, algorithmic trading eliminates emotional influences, leading to more rational and consistent decision-making.
• Algorithms follow pre-defined rules without deviation, ensuring consistent execution of trading strategies.
• Traders can backtest their algorithms on historical data to evaluate their performance and refine strategies before live trading.
• Automated systems can operate around the clock without fatigue, taking advantage of opportunities in different time zones.
• Algorithmic trading can handle large volumes of trades simultaneously, making it scalable for various market conditions.
• Algorithms can implement advanced risk management techniques, such as dynamic stop-loss and take-profit orders.

Disadvantages of algorithmic trading

• Technical glitches or software bugs can lead to incorrect trade executions and potential losses.
• Sudden market shifts can result in algorithmic systems making poor decisions, leading to significant losses.
• Developing and maintaining an algorithmic trading system can be expensive and time-consuming.
• Algorithmic trading relies heavily on technology, making it vulnerable to issues such as server downtime and internet connectivity problems.
• Algorithms that are overly optimized for historical data may perform poorly in live markets due to changing conditions.
• Creating effective algorithms requires a deep understanding of both trading strategies and programming.
• Once set, algorithms may not adapt well to unforeseen market conditions or events.

Choosing the Suitable Trading Strategy

We have gone through the top nine Forex trading strategies with their advantages and disadvantages. Now, it's time to choose the best trading strategy for your purposes. Keep in mind that there is not only one way to approach.

Here is a list of what you need to consider when choosing the best trading strategy for your purposes:

• Financial Goals
• Risk Tolerance
• Time Commitment
• Market Knowledge
• Capital Size

Financial Goals

You have to define your financial goals first and choose a strategy that fits them. Are you going for a short-term or long-term?

If your goal is to achieve quick profits within a short period, short-term trading methods such as day trading and scalping might be suitable for you. These strategies involve high-frequency trading and require active monitoring of the market, allowing you to capitalize on small price movements throughout the trading day.

For those aiming for more sustained growth over a longer period, medium-term and long-term strategies like swing trading and position trading are more appropriate.

Risk Tolerance

Before deciding on your strategy, determine how much risk you are prepared to take. If you're new to trading or don't want to take high risks, you can consider starting with position trading. You can also go with swing trading, which offers a more relaxed approach to day trading.

If you can read the trading indicators and are good with technical analysis, you may try day trading, scalping, momentum trading, and algorithmic trading.

Time Commitment

Decide on how much time you would spend on trading because some strategies demand active monitoring. Evaluate your time and financial goals to choose your approach.

Market Knowledge

Market knowledge is an important determinant of trading. Consider your understanding of the financial markets. If you have limited knowledge or just getting into the trading business, you can consider some day trading with a little training. If you are well aware of the financial markets, then you can consider other strategies as well.

Capital Size

Consider the amount of capital you have available for trading. Some strategies, like algorithmic trading, may require substantial initial investment or technical expertise. Ensure your chosen strategy aligns with your capital size and expectations.

Trading Types in Short

We have covered the nine top trading strategies. Take your expectations, risk limits, time commitment, market knowledge, and capital size into consideration and decide on your trading method.

Keep in mind that there is not only one good strategy. Evaluate your purposes and consider different techniques for different types of trading. It's best to learn more about the market and turn knowledge into practice. 

You can open a demo account on zForex to start learning and improving your strategies.