Different type of trading strategy

What Are The Different Types Of Forex Trading Strategies?

Forex traders use a variety of strategies and techniques to determine the best entry and exit points—and timing—to buy and sell currencies. Market analysts and traders are constantly innovating and improving upon strategies to devise new analytical methods for understanding currency market movements. What follow are some of the more basic categories and major types of strategies developed that traders often employ.

Fundamental Analysis.

In fundamental analysis, traders will look at the fundamental indicators of an economy to try to understand whether a currency is undervalued or overvalued, and how its value is likely to move relative to another currency. Fundamental analysis can be highly complex, involving the many elements of a country’s economic data that can indicate future trade and investment trends.

A good place for traders to start, however, is in analysing currency inflows and outflows of an economy, which are often published by the nation’s central bank. Additionally, they may rely on news and data releases from a country to get a notion of future currency trends. 1) Retrieved 19 February 2016 cfapubs. org/doi/pdf/10.2469/cp. v1997.n7.3.

Technical Analysis.

Technical analysis is another main category of currency trading strategies that is highly favoured among traders. Most often it involves reviewing the past and recent behaviour of currency price trends on charts to determine where they may move going forward. The rationale behind using technical analysis is that many traders believe that market movements are ultimately determined by supply, demand and mass market psychology, which establishes limits and ranges for currency prices to move upward and downward.

Technical analysis encompasses a long list of individual methods used to detect likely currency trends. Many traders appreciate technical analysis because they feel it gives them an objective, visual and scientific basis for determining when to buy and sell currencies. 2) Retrieved 19 February 2016 research. stlouisfed. org/wp/2011/2011-001.pdf.

Trend Trading.

Trend trading is one of the most popular and common forex trading strategies. It involves identifying an upward or downward trend in a currency price movement and choosing trade entry and exit points based on the positioning of the currency’s price within the trend and the trend’s relative strength.

Traders will often cite the phrase, “The trend is your friend,” as a reminder that recent trends can be reliable indicators of where prices are likely to go moving forward and where to best set up trade entry and exit points. Trend traders use a variety of tools to evaluate trends, such as moving averages, relative strength indicators, volume measurements, directional indices and stochastics. 3) Retrieved 19 February 2016 bis. org/publ/work366.pdf.

Range Trading.

Range trading is a simple and popular strategy based on the idea that prices can often hold within a steady and predictable range for a given period of time. That’s particularly evident in markets involving stable and predictable economies, and currencies that aren’t often subject to surprise news events.

Range traders rely on being able to frequently buy and sell at predictable highs and lows of resistance and support, sometimes repeatedly over one or more trading sessions. Range traders may use some of the same tools as trend traders to identify opportune trade entry and exit levels, including the relative strength index, the commodity channel index and stochastics. 4) Retrieved 19 February 2016 scribd/document/70399933/MTA-Journal-Anatomy-of-a-Trading-Range.

Momentum Trading.

Momentum trading and momentum indicators are based on the notion that strong price movements in a particular direction are a likely indication that a price trend will continue in that direction. Similarly, weakening movements indicate that a trend has lost strength and could be headed for a reversal. Momentum strategies may take into consideration both price and volume, and often use analysis of graphic aides like oscillators and candlestick charts. 5) Retrieved 19 February 2016 bis. org/publ/work366.pdf.

Swing Trading.

Swing trading is customarily a medium-term trading strategy that is often used over a period from one day to a week. Swing traders will look to set up trades on “swings” to highs and lows over a longer period of time. This is to filter out some of the “noise,” or erratic price movements, seen in intraday trading. It’s also to avoid setting narrowly placed stop losses that could force them to be “stopped-out” of a trade during a very short-term market movement. 6) Retrieved 19 February 2016 researchgate/publication/227624248_Simple_trend-following_strategies_in_currency_trading.

Breakout Trading.

A breakout strategy is a method where traders will try to identify a trade entry point at a breakout from a previously defined trading range. If the price breaks higher from a previously defined level of resistance on a chart, the trader may buy with the expectation that the currency will continue to move higher. Similarly, if the price breaks a level of support within a range, the trader may sell with an aim to buy the currency once again at a more favourable price. 7) Retrieved 19 February 2016 bis. org/publ/work366.pdf.

Retracement.

Retracement strategies are based on the idea that prices never move in perfectly straight lines between highs and lows, and usually make some sort of a pause and change of their direction in the middle of their larger paths between firm support and resistance levels.

With this in mind, retracement traders will wait for a price to pull back, or “retrace,” a portion of its movement as a sign of confirmation of a trend before buying or selling to take advantage of a longer and more probable price movement in a particular direction. Traders will often pick a particular percentage movement as a sign of confirmation (such as 50%), or rely on Fibonacci ratios (of 23.6%, 38.2% or 61.8%) to help identify optimal points for entering and exiting trades. 8) Retrieved 19 February 2016 scientificpapers. org/wp-content/files/1134_How_to_use_Fibonacci_retracement_to_predict_forex_market. pdf.

Reversal Trading.

As the name implies, reversal trading is when traders seek to anticipate a reversal in a price trend with the aim to guarantee entrance into a trade ahead of the market. This strategy is considered more difficult and risky. True reversals can be difficult to spot, but they’re also more rewarding if they are correctly predicted.

Traders use a variety of tools to spot reversals, such as momentum and volume indicators or visual cues on charts such as triple tops and bottoms, and head-and-shoulders patterns. 9) Retrieved 19 February 2016 riverpublishers/journal/journal_articles/RP_Journal_2245-456X_211.pdf.

Position Trading.

Position trading is a long-term strategy that may play out over periods of weeks, months or even years. Position traders often base their strategies on long-term macroeconomic trends of different economies. They also typically operate with low levels of leverage and smaller trade sizes with the expectation of possibly profiting on large price movements over a long period of time.

These traders are more likely to rely on fundamental analysis together with technical indicators to choose their entry and exit levels. This type of trading may require greater levels of patience and stamina from traders, and may not be desirable for those seeking to turn a fast profit in a day-trading situation. 10) Retrieved 19 February 2016 futuresmag/2007/02/23/long-term-position-trading.

Carry Trade.

Carry trade is a unique category of forex trading that seeks to augment gains by taking advantage of interest rate differentials between the countries of currencies being traded.

Typically, currencies bought and held overnight will pay the trader the interbank interest rate of the country of which the currency was purchased. Carry traders may seek out a currency of a country with a low interest rate in order to buy a currency of a country paying a high interest rate, thus profiting from the difference.

Traders may use a strategy of trend trading together with carry trade to assure that the differences in currency prices and interest earned complement one another and do not offset one another. 11) Retrieved 19 February 2016 kellogg. northwestern. edu/faculty/rebelo/htm/carry. pdf.

Pivot Points.

Pivot point trading seeks to determine resistance and support levels based on an average of the previous trading session’s high, low and closing prices. This average is considered to help predict the next likely highs and lows, and intraday market reversals.

Because these averages are widely used in the market, they are considered a healthy gauge for how long a short-term trend may continue, and whether a particular range has been surpassed and a new price trend breakout is occurring. 12) Retrieved 19 February 2016 books. google/books? isbn=111804648X.

Traders have a wide variety of strategies at their disposal to try to interpret price movements and take advantageous trading positions. Some traders may use a particular approach almost exclusively, while others may employ a variety or hybrid versions of the strategies described above.

While none is guaranteed to work all of the time, traders may find it useful to familiarise themselves with a number of strategies to build an arsenal of available tools for adapting to changing market conditions.

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Trading strategies.

In this course you’ll learn about a variety of trading strategies. With a better understanding of the types of strategies available you can make a well informed decision about which types may be right for your portfolio.

Objectives.

When you complete this course, you will:

Be familiar with the key terms and concepts of different trading strategies Know the potential benefits and risks involved with various trading strategies Determine which trading strategy or strategies may be right for your portfolio.

Keep in mind, whatever strategy you choose, stops and money management are essential to your success.

In this section, Risks of Day Trading, investors will learn about some of the requirements day traders must meet; this section underscores the importance of meeting these requirements.

There are consistent characteristics that events have over time. You can begin to build a strategy or portfolio and be ready to take advantage of these events should they start to appear.

The pairs trader attempts to capitalize on market imbalances between two or more financial instruments, such as stocks or funds, in anticipation of making money when the inequality is corrected.

The goal of a range trade is to find a point at which price has stretched too far above or beneath the average price and must snap back like a rubber band and/or to find a point where resistance or support has formed and is likely to hold again.

In this section, Traditional Shorting-Borrower Beware, investors will learn about some of the aspects of selling short to keep in mind; this section underscores the importance of monitoring borrowing costs, dividend payment schedules, and co-mingling of long and short positions.

A variety of technical analysis tools can be used to assist with a momentum-based approach. To learn more about these tools please visit our Technical Analysis section.

Other Courses Like This.

Course Details.

Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you're most comfortable with. As with all your investments, you must make your own determination as to whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.

Types of trading and various trading strategies.

Trading is the central activity in all markets, be it the forex, commodities, equities or the bonds and treasuries market. Literally, the word “trading” means “an exchange of goods and services with money or money’s worth.” In terms of financial markets, trading indicates an act of buying and selling of financial assets/securities in order to make profits over a certain period of time. There are various kinds of trading practices that investors follow while carrying out a financial transaction. Three types of trading stand out as the main trading systems, and various trading strategies are associated with each of them.

The three major types of trading are.

While day trading and swing trading are short-term in nature, positional trading is of longer-term duration. Each of them serves a different purpose and suits different investor types.

Day trading is a type of trading wherein traders buy or sell currencies for a single day in the hope of making desired profits. Day traders always close their trades within the same day, which minimizes risks associated with overnight movements in the market. By the end of the day, they exit with whatever profits or losses they have. The main objective of a day trader is to earn quick benefits from small price movements on an intra-day basis. There are four types of trading strategies that a day trader practices.

Scalping: Scalpers are concerned with only small changes in quotes. They put large orders at a certain level and after a small gain, let’s say 10 to 20 pips, they immediately reverse the position and exit. Scalpers believe that small moves in quotes are easier to capture than large ones. They also believe that by taking advantage of small moves in large positions, they can multiply profits.

Fading: Fading is a risky trading strategy wherein an investor trades against the prevailing market direction. The investor buys in times of declining prices and sells when the prices are increasing. The underlying psychology of a fade-trader is to take advantage of any price reversal because after a sharp decline or rise in the currency, it is bound to have show some reversals. This type of trading is extremely risky but is advantageous as well. It offers handsome amounts of return when it works. Fade-traders are often considered greedy, but generally they are simply risk takers. They follow strict risk management rules which offer specified fixed risks.

Daily Pivot: This type of trading strategy is based on a statistical tool called the pivot table. This table determines the pivot point, supports and resistances for the current movement. A trader then identifies the market movement and trades accordingly. The following are formulas which calculate pivot points:

Pivot Point for Current Price Level = High + Low + Close (previous)

Resistance 1 = (2 x Pivot Point) – Low (previous period)

Pivot traders need to strictly use risk management tools to be successful. For example, if a trader generates a buy position at the current price, he/she uses the closest support as the stop-loss, while the target price is determined by the closest resistance. Pivot traders are dependent on statistical calculations and work more like machines than following a rationale behind the movement. In volatile markets, there is a higher chance of the stop-loss being triggered, which is why this strategy is more suitable for less volatile markets.

Momentum trading: The last type of trading strategy for day trading is one which rides on the ongoing movement in the market. Traders take a buy position when a currency is rising and sell when it is declining. They identify currency pairs which are moving significantly in one direction and trade accordingly. They use various momentum indicators, like the momentum oscillator, RSI, MACD, etc. in order to identify the strength of the current movement and decide whether to take positions and in which direction.

Like day trading, swing trading is another type of short-term trading. The basic difference between swing trading and day trading is the time frame: While day trading is limited to a single day, swing trading often stretches over more than one day in order to take advantage of quote swings. Similar to day trading, investors don’t hold positions long-term and don’t calculate in a long-term scenario. The time frame for swing trading may be an hour, a day or maximum a couple of days. Swing traders generally target higher profits than day traders. At the same time risks – especially those associated with holding positions overnight – are higher. Generally, three different swing trading strategies are distinguished.

Breakout trading: Breakout trading takes advantage of breakouts on charts. The breakouts can be small, like the high on an intraday chart, or they may be huge breakouts on daily, weekly and monthly charts. A breakout trader looks at the breakout point, asses if and when a currency quote witnesses those breakouts, and then takes their position and put the target close to next support or resistance level. They also maintain strict stop-loss points close to the breakout point which reduces their risk in times of adverse price movements.

Retracement trading: Another trading strategy for swing traders is retracement trading. The underlying technical indicator used for retracement trading is the Fibonacci Retracement. It is a mathematical calculation showing the retracement levels based on the Fibonacci ratios of 0%, 23.6%, 38.2%, 50%, 61.8%, and 100%. Fibonacci retracements are horizontal lines which indicate supports or resistances of the current trend. They are calculated by first locating turning points in the given chart: One needs to find the highest level and the lowest level of the quote during the specified time period. Then a line is drawn from the high to the low or the other way round. Six lines are drawn at different Fibonacci levels: 100% indicates the start of the move while 0% indicates the reversing point. 23.6%, 38.2%, 50% and 61.8% indicate the various support or resistance levels. The basic idea behind retracement trading is that when a price rises to a certain level and starts correcting, chances are high that it will test the previous levels.

Reversal trading: Reversal trading works when the market moves within a certain range. For example, if a currency quote starts facing selling pressure after testing highs, the quote is expected to test the lower levels again. Trader takes short position while the currency pair reverses from the high levels with the high being the stop-loss point. They take sell positions when the currency pair starts reversing from the lowest level in a range with the stop-loss being the low of the range.

The last type of trading practice is positional trading. Positional traders look for benefits from price movements over a comparatively longer time than swing or day traders. They generally hold their positions from days to weeks and sometimes for months as well. One of the keys to positional trading is to identify currency pairs which promise large movements. Positional trading always depends upon a mixture of fundamental and technical analysis. Positional traders always look for the longer-term effect of fundamental factors and then use technical analysis to decide the entry and exit points for the currency pair. In comparison to the other two types, positional traders expect a higher profit, while at the same time different risks are associated with the longer holding period.

This list of trading types and associated strategies is not exhaustive. However, the three most common trading practices – day trading, swing trading and positional trading – offer many opportunities for both beginners and experienced traders. Pivot trading – which mostly requires statistical formula that are generally built-in in many trading platforms – and retracement trading are some of the simpler strategies that are suitable for beginners. Reversal trading, breakout trading, scalping and fading, on the other hand, require a lot more skill and increased efforts from traders and therefore are generally practiced by more experienced market players. Positional trading is a blend of fundamental and technical analysis which takes traders a long time to practice and perfect. Not only level of experience and planned effort, but also the planning horizon should play a role in picking the right trading strategy: Positional trading are suitable for long-term investment strategies, while day trading and swing trading suit short-term investors better.

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Foreign exchange (Forex) trading carries a high level of risk and may not be suitable for all investors. The risk grows as the leverage is higher. Investment objectives, risk appetite and the trader's level of experience should be carefully weighed before entering the Forex market. There is always a possibility of losing some or all of your initial investment / deposit, so you should not invest money which you cannot afford to lose. The high risk that is involved with currency trading must be known to you. Please ask for advice from an independent financial advisor before entering this market. Any comments made on Forex Crunch or on other sites that have received permission to republish the content originating on Forex Crunch reflect the opinions of the individual authors and do not necessarily represent the opinions of any of Forex Crunch's authorized authors. Forex Crunch has not verified the accuracy or basis-in-fact of any claim or statement made by any independent author: Omissions and errors may occur. Any news, analysis, opinion, price quote or any other information contained on Forex Crunch and permitted re-published content should be taken as general market commentary. This is by no means investment advice. Forex Crunch will not accept liability for any damage, loss, including without limitation to, any profit or loss, which may either arise directly or indirectly from use of such information.

Introduction to Types of Trading: Fundamental Traders.

Fundamental trading is a method by which a trader focuses on company-specific events to determine which stock to buy and when to buy it. Trading on fundamentals is more closely associated with the buy-and-hold strategy of investing than with short-term trading. There are, however, specific instances in which trading on fundamentals can generate some nice profits in a short period.(You can read about momentum trading in Introduction to Types of Trading: Momentum Traders .)

Reviewing Different Types of Traders.

Scalping - The scalper is an individual who makes dozens or hundreds of trades per day, trying to "scalp" a small profit from each trade by exploiting the bid-ask spread. (You can read about scalping in Introduction to Types of Trading: Scalpers .) Momentum Trading - Momentum traders look to find stocks that are moving significantly in one direction on high volume and try to jump on board to ride the momentum train to a desired profit. Technical Trading - Technical traders are obsessed with charts and graphs, watching lines on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals. Fundamental Trading - Fundamentalists trade companies based on fundamental analysis, which examines things like corporate events such as actual or anticipated earnings reports, stock splits, reorganizations or acquisitions. Swing Trading - Swing traders are really fundamental traders who hold their positions longer than a single day. Most fundamentalists are actually swing traders since changes in corporate fundamentals generally require several days or even weeks to produce a price movement sufficient enough for the trader to claim a reasonable profit.

Novice traders might experiment with each of these techniques, but they should ultimately settle on a single niche, matching their investing knowledge and experience with a style to which they feel they can devote further research, education and practice. (You can read about technical trading in Introduction to Types of Trading: Technical Traders .)

Let's begin our exploration of fundamental trading.

Most equity investors are aware of the most common financial data used in fundamental analysis: earnings per share, revenue and cash flow. These quantitative factors can include any figures found on a company's earnings report, cash-flow statement or balance sheet; these factors can also include the results of financial ratios such as return on equity and debt to equity. Fundamental traders may use such quantitative data to identify trading opportunities if, for example, a company issues earnings results that catch the market by surprise.

Two of the most closely watched fundamental factors for traders and investors everywhere are earnings announcements and analyst upgrades and downgrades. Gaining an edge on such information, however, is very difficult since there are literally millions of eyes on Wall Street looking for that very same edge.

Analyst Upgrades and Downgrades.

Earnings announcements and analyst ratings are actually closely associated with momentum trading, which keeps alert to unexpected events that cause a stock to trade a large volume of shares and move steadily either up or down.

The fundamental trader is often more concerned with gaining an edge on information about speculative events that the rest of the market may lack. To stay one step ahead of the market, astute traders can often use their knowledge of historical trading patterns that occur during the advent of stock splits, acquisitions, takeovers and reorganizations.

To trade successfully on stock splits, a trader must, above all, correctly identify the phase at which the stock is currently trading. Indeed, history has proven that a number of specific trading patterns occur before and after a split announcement: price appreciation and therefore short-term buying opportunities will generally occur in the pre-announcement phase and the pre-split run-up; and price depreciation (shorting opportunities) will occur in the post-announcement depression and post-split depression. By identifying these four phases correctly, a split trader can actually trade in and out of the same stock at least four separate times before and after the split, with perhaps many more intra-day or even hour-by-hour trades.

Acquisitions, Takeovers and Reorganizations.

The old adage "buy on rumor, sell on news", applies to trading on acquisitions, takeovers and reorganizations. In these cases, a stock will often experience extreme price increases in the speculation phase leading up to the event and significant declines immediately after the event is announced.

That said, the old investor's adage "sell on news" needs to be qualified significantly for the astute trader. A trader's game is to be one step ahead of the market, so he or she is very unlikely to buy a stock in a speculative phase and hold it all the way to the actual announcement. The trader is concerned about capturing some of the momentum in the speculative phase, and may trade in and out of the same stock several times as the rumor mongers work their magic. He may hold a long position in the morning and short in the afternoon, being ever watchful of charts and Level 2 data for signs of when he or she should change position.

And when the actual announcement is made, he or she will likely have an entirely different trading opportunity: the trader will likely short the stock of an acquiring company immediately after it issues news of its intent to acquire and thereby ending the speculative euphoria leading up to the announcement. Rarely is an acquisition announcement seen positively, so shorting a company that is doing the acquiring is a doubly sound strategy.

By contrast, a corporate reorganization may very well be viewed positively if the market had not been expecting it, and if the stock had already been on a long-term slide due to internal corporate troubles. If a board of directors suddenly ousts an unpopular CEO, for example, a stock may very well exhibit short-term upward movement in celebration of the news.

Trading the stock of a takeover target presents a special case since a takeover offer will have a price per share associated with it. A trader has to be careful to avoid getting stuck holding stock at or near the offer price because the stock will generally not move significantly in the short-term once it finds its narrow range near the target. Particularly in the case of a rumored takeover, the best trading opportunities will be in the speculative phase, the time in which a rumored price per share for the takeover offer will drive actual price movement.

Rumor and speculation are risky trading propositions, especially in the cases of acquisitions, takeovers and reorganizations - such events may spawn extreme stock-price volatility. Because, however, of the potential for rapid price movements, these events also potentially serve as the most lucrative fundamental-trading opportunities available. (You can read about swing trading in Introduction to Types of Trading: Swing Traders .)

If fundamental traders are able to correctly identify the current position of stocks and subsequent price movements that are likely to occur, they stand a very good chance of executing successful trades. Trading on fundamentals may be risky in cases of euphoria and hype, but the astute trader is able to mitigate risk by making history his or her guide to short-term trading profits. In short, do your homework before jumping in.