Tavagapedia

Trading strategy

Key Takeaways

  • Trading strategy is any set of rules to ensure a profit in trading
  • Day trading, position trading, swing trading and scalping are common active trading strategies

What is a Trading Strategy?

Trading strategy is any set of rules to ensure a profit in trading. Technical and/or fundamental analysis are/is used to devise a trading strategy.

Trading strategies work to standardise investment by building trading triggers around predefined indicators. A hypothesis about how the market behaves is made, then tested with historical data, and if proven right, it is adopted as a trading strategy in the live markets.

Trading strategies are prepared considering the objective of investment, time horizon, tax implications and risk tolerance. A trading strategy mainly has three stages. First one is planning, in which investment method regarding buying or selling of different financial instruments is prepared. Second phase is ‘placing trade’ in which discussions with brokers are done to identify and manage trading costs. The third stage is execution. After execution is done, trading positions are managed.

What are the different trading strategies?

There are many strategies which can be incorporated. The most common of them are mentioned below:

Day Trading: Day trading is the most popular trading strategy. Under this strategy, financial instruments are bought and sold within the same day. Usually, day trading is performed by specialists or professional traders. These days, with electronic trading, new traders can also do day trading.

Position Trading: This trading makes use of long-term charts and other methods to determine market trends. Trade done by this strategy may last for many days or weeks.

Swing Trading: Swing trading strategy is often used when a market trend breaks and price volatility sets in. Before a new trend is stabilised, swing traders sell or buy during this time.

Scalping: This is a very quick strategy used by the traders. It is based on exploiting the price gaps that occur due to order flows and bid-ask spread.

Example

Say a hypothesis is made that stocks which have seen their net income increase consistently in the past three quarters will give a positive return in the next quarter too. If historical data supports this proposed trend and there are no imminent macroeconomic changes, we may take the hypothesis to the live markets to trade in a way that we profit from such stocks’ price movements.