Trading operation on the stock exchange today represents a viable solution for generating profit, in the context of a solid background of knowledge and a minimum experience in understanding the mechanisms underlying stock transactions.
After a year marked by uncertainties generated by the pandemic, 2021 is proving to be one with numerous challenges and bold projects for the stock market. The stock market therefore becomes the key to the health of the real economy.
Any trading activity on the stock exchange requires a high level of documentation, caution and patience, thus there is a guarantee of an anticipated result.
It is essential to mention that when we talk about trading on the stock market, we are implicitly talking about studying in advance some concepts, trading platforms and adopting some safe strategies that allow effective control of the way one invests.
The importance of stock market trading strategies
Regardless of the financial instruments traded, successful investors use a set of solid strategies and an excellent money management system to keep profitability as high as possible.
In the context of survival in a highly competitive financial market, stock trading strategies must be properly created and tested. Thus, if your strategy is based on chaotic bets, trading is doomed to failure.
Stock market trading strategies
In the financial markets, there are several trading strategies that you can use to enjoy success. So here they are:
1. Trading by economy news
It involves making decisions in line with economic news and market expectations. However, it depends on the promptness of the investor because:
- news must be analyzed immediately after release;
- decisions must be made quickly before competitors.
The approach of this strategy takes into account whether the price of a financial instrument fully or only partially takes into account news and whether it is in correspondence with market forecasts.
In addition, news trading has the following advantages:
- It is a clear strategy for entering/exiting a transaction, aiming at how to interpret the news;
- News offers many business opportunities;
Disadvantages of the strategy include high overnight risk (trading positions can be open for several days) and some expertise (for objective understanding of how news affects positions and the financial market).
2. Position trading
It refers to that situation where the investor holds a position for a long period of time (months/years), ignoring minor price changes in favor of profiting from long-term trends. Potential market price trends are assessed using fundamental analysis and other factors.
It is an advantageous strategy because it involves high profits and does not involve daily checking of positions. However, the strategy may determine:
- significant losses as traders ignore fluctuations that completely reverse trends;
- increase in the value of the swap commission (paid to the broker) due to keeping the position open for a long period of time.
3. Trading at the end of the day
This strategy can be applied when trading takes place at the close of the markets. At the end of the day, traders become active when there is certainty that the price will stabilize or close. The strategy is implemented after a comparative price analysis with the previous day’s price fluctuations.
At the end of the day, they:
- speculate on how price varies based on price action;
- make decisions regarding the indicators that will be used by the system.
The end-of-day trading strategy is suitable for most types of trades (no need to enter multiple positions) and is not time-consuming (chart analysis and order placement can be done in the morning/night). However, it carries a high overnight risk, which can be mitigated with a stop loss order.
4. Swing trading
The Swing Strategy involves purchasing a share or other asset and holding the position for a short period of time (a few days/weeks) in order to make a profit. This includes market analysis by studying charts, individual price movements and identifying trends where markets are benefiting from increases in supply and demand.
Even though it is recommended for people with limited time, the strategy requires special analysis to understand fluctuation patterns. In addition, swing trading provides multiple trading opportunities. Similar to the end-of-day strategy, the swing strategy involves overnight risk, which can be mitigated by placing a stop-loss order on the positions.
5. Algorithmic trading
It uses an application that follows a defined set of instructions (an algorithm) to perform a transaction. The strategy can generate profits at a speed and frequency impossible for the human trader.
The main advantages are:
- automated execution of transactions at the best prices;
- preventing significant price changes;
- eliminating errors caused by emotional factors, etc.
However, the strategy is characterized by disadvantages such as: dependence on technology, the need for constant monitoring, programming knowledge, etc.
6. Hedging trading
Hedging involves preventing potential risks that occur in trading operations. The strategy is viewed as an investment to reduce the risk of price fluctuations of a financial instrument.
Calling the hedging strategy is insurance against currency risks, price volatility and stock market corrections.
Investors frequently use hedging strategies, monitoring risks more effectively. They can make transactions based on the Long Hedge strategy (used in case of rising prices or the currency rate) or the Short Hedge strategy (used in the case of falling prices or currency depreciation).
7. Arbitrage trading
It follows the anticipation of spreads that have arisen between the markets of a product in order to obtain a profit generated by these differences. Basically, a product traded on the spot and futures market will show different indices due to the difference in delivery generated between the two markets.
The application of the strategy involves:
- live access to quotes;
- effective steps to maximize this opportunity.
As an advantage, this type of operation presents minimal risks of contrarian positions appearing simultaneously in both markets. Thus, an advantageous difference seen as a profit is identified, regardless of the direction in which the prices of that product evolve in these markets.
8. Scalping trading
Scalping trading targets trading on short time frames. Such operations imply versatility in the market and an optimal level of liquidity. So it is recommended to use assets like stock indices or currencies.
This type of trading is frequently used by traders who value short exposure time to the market with limited risk.
Forex scalping is gaining more and more interest due to the short-term trading opportunities generated in the forex markets. Compared to other trading strategies, scalping involves small but frequent profits.
9. Trading based on optimizing the medium price (Dollar Cost Averaging)
It is used especially by investors who do not want a high exposure to risks, it is applied in the case of investments in the stock market and in ETFs (assets such as bonds, indices, shares). Investing in stocks is seen as a challenge as there are risks involved in buying at a high price. However, this risk can be minimized through a rational division of the invested amount, at regular time intervals.
10. Reverse trading
Reverse trading is regarded as an advanced and risky trading strategy, assuming the reversal of the trend that covers the entire market. This consists in identifying the opportune moment when a trend is in the process of reversal.
According to this strategy, investments are made in relation to trends. But, it takes expertise and vast knowledge of the market not to risk mispredicting the timing of the reversal.
Which is the right trading strategy for you?
Over time, you will find that your success may depend on creating a strategy adapted to market conditions and other criteria of interest. To find out what aspects you need to take into account in creating the best strategy and to become a successful trader, Vestor offers you a wide range of investment and trading courses on the stock market. Sign up now!