In this video, we give you a quick overview of the characteristics and features of three popular trading strategies. Although there are many different strategies that can be used in trading, for the sake of this article we will focus on Day Trading, Position Trading and Swing Trading.
Trading strategies such as Day Trading, Position Trading and Swing Trading are implemented by traders in the hope of profiting in the financial markets.
What is a trading strategy and why is it important?
In the world of trading, a strategy is a plan or action you can implement in order to make better trading decisions and try to maximise your earning potential when buying or selling financial products such as CFDs on stocks, commodities, forex pairs and indices. In most cases, a strategy can be customised to your specific preferences and used in conjunction with other strategies.
Having a strategy is important for you as a trader because, when executed correctly, it may help you reach your financial goals. Examples of financial goals could include the establishment of risk tolerance levels, short-term profits versus long-term profits or having a level of financial security to make a major purchase or to improve your cash flow.
What are the most popular strategies?
Three of the most popular trading strategies are:
- Day Trading
- Position Trading
- Swing Trading
Below is some information about each strategy and its key characteristics.
Key Characteristic: Multiple small-size trades held for a short time frame.
As its name implies, the day trading strategy focuses on opening Buy/Sell positions on financial instruments and closing them on the same day (i.e., before the market closes for the trading day). It is a form of trading that requires the ability to respond quickly to fluctuations and subsequent trading opportunities that may arise in the market.
Typically, Day Traders open a number of smaller trades and use stop orders, such as ‘Close at Profit’ (to lock in potential profits), and/or ‘Close at Loss’ (to manage potential losses that can occur).
Due to the volatile nature of financial markets and the rapid price changes that are possible, day trading can have the potential to be very profitable, but also very unprofitable.
Key Characteristic: A single or few large-size trades held for a relatively long time frame.
Position trading is a medium-term holding strategy where traders keep positions open for longer periods of time such as days, weeks or even months.
This strategy typically relies heavily on fundamental analysis, which is a method of measuring the value of a financial instrument by examining freely-available macroeconomic data (e.g. gross domestic product, supply-to-demand ratio, the rate of employment, the rate of inflation, ease of doing business, etc.). To see when major economic events take place, you can use our Economic Calendar.
A position trader may wait until a stock, such as Netflix, reaches a specific support level before taking a long position, or a specific resistance level before taking a short position - and holding it for a few weeks.
There is presumably less immediacy associated with this type of trading, as traders are not necessarily concerned with intraday prices and generally open a small number of positions.
However, traders need to have a firm grasp of market fundamentals given the reliance on fundamental analysis.
Key Characteristic: A single trade aimed at catching a trend and which is held for a longer time frame.
In swing trading, a trader typically uses technical analysis to look for certain patterns (upward or downward trends in the market). Technical analysis involves the usage of indicators, such as chart tools, to analyse past performance in order to determine the direction of price movements.
The core idea of swing trading is to spot a market trend and try to time the entry into a position in order to catch (and ride) the wave before it crashes. A rising wave represents an upward swing and a falling wave represents a downward swing.
For this strategy, you can make use of the 90+ trading indicators we provide, such as moving averages and Bollinger Bands, which are offered free of charge to all traders.
To try our indicators, simply sign up / log in, select a financial instrument, go to its chart and click on the (Fx) icon.