Trading Strategies give traders a specific path for trading within a particular trading style. There are innumerable trading strategies to choose from, so a good place to start is to establish your trading style, which can help you narrow down the trading strategies that work best for your particular style of trading.
A Trading Style is a set of parameters that defines how you approach ALL of your trading, including the trading strategies you use. So first, you must establish your trading style, and then you can choose trading strategies that work well for your trading style. Successful traders tend to use 1 or 2 trading strategies for their chosen trading style.
Trading Styles: The Rules of Your Trading Strategies
When you establish your trading style, you are setting up the parameters and rules for your whole trading approach. Your trading style dictates how you use a trading strategy. So, you must consider your personality, your risk tolerance, your capital base, how much time you have to devote to trading, and your interests in the financial markets.
Swing Trading can be used for trading any financial trading instrument. This is a style of trading that holds a stock for 1–10 days, over the duration of one run in the stock price. Swing Trading is a great style for short-term traders who enjoy technical analysis and fast price action. Learning this style of trading is a good way for day traders to learn how to hold on to a position for more than a day through proper chart and risk analysis. Swing Trading tends to net better profits than Day Trading if it is done right. You can make more money holding over a few days rather than cutting profits short by selling the same day. The key is learning the proper technique.
Momentum or Velocity Trading
This style of trading is a subcategory of Swing Trading that focuses on increasing energy patterns, holding only as long as energy increases, usually for up to just a few days. Momentum Trading uses the same rules of Swing Trading with a particular focus on growing energy and taking profits before a change in the stock price’s short-term trend.
Position Trading is a style that holds a stock anywhere between a few weeks to a few months based on basic fundamental strength and strong intermediate-term technical patterns. Because the hold time is longer, more points, aka dollars per share, can be targeted. It can be done in just a few hours a week and with less capital to start. This is a good trading style for beginners in the stock market and for people who don’t have all day every day to study the market. It is also a good trading style for new options traders. Position Trading can also be a good transition into short-term trading from long-term investors.
This is the style of trading that most people who are new to the market think “trading” is. Alas, Day Trading is just one style of trading among many. Day Trading is the holding of a stock for one day, not holding it over a night. The capital base requirement is much higher, and the online brokers require a minimum of $25,000 in your account in order to be allowed to day trade, but really, you need much more to do well. This trading style requires a daily commitment and also watching your trades during the day, every trading day.
A Day Trader should have well-developed technical analysis and risk management skills. This style and also Intraday Trading are the most demanding of all trading styles, so they require the most skill, experience, capital, and commitment to be successful.
Intraday Trading is a type of Day Trading where a stock is either traded several times in one day or held for a portion of a full trading day. For example, a common style among professional short-term traders is to enter the stock at the end of the day and exit at the beginning of the next day to take advantage of High Frequency Trading activity. Intraday Trading follows the same rules and parameters of Day Trading, but with a specific way of managing a trade for the shortest hold time.
Long-Term Investing for Retirement is holding a stock for more than one year for the highest gain possible over a very long hold time. In our opinion, everyone should have a long-term account. But if all you do is invest for the long term, then you are a person who enjoys fundamental analysis, which is the study of a stock’s business as well as its long-term growth cycle. It doesn’t take a lot of money or time to do. Monthly or quarterly maintenance should be done to monitor the overall market and your holdings’ long-term chart patterns and fundamentals.
Trading Strategies for the Rules of Your Trading Style
Once you have your trading style established according to how you want to trade—how often, how much time you need to devote, how much capital you have to start with, how much maintenance your trades need—and also the rules you will use in your trading well practiced, then you can focus on the particular trading strategies you will use.
The best traders focus on just one or two. Don’t confuse your trading by using every strategy that comes across your desk. Specializing in an area of trading should be the goal of any trader or investor.
Examples of Trading Strategies According to Trading Style
Position Trading Strategies: Earnings, sectors, Initial Public Offerings (IPOs), breakouts, business cycle.
Swing Trading Strategies: Earnings, dividends, sectors, IPOs, breakouts, momentum energy patterns, trading a set of the same few stocks over and over as entry setups occur, Exchange-Traded Funds (ETFs).
Day and Intraday Trading Strategies: Earnings, news, IPOs, trend-following.
Your Trading Style prescribes how you will go about using each trading strategy. So an earnings strategy, for example, looks very different for a position trader than it does for a swing trader. Earnings strategies can be used by position, swing, momentum, day or intraday traders, but how each style of trading goes about it is different.
Position traders are looking for a longer-term pattern that exposes quiet accumulation by the big long-term institutional investors several weeks before the earnings release; they have also done some basic fundamental analysis to confirm their analysis of the stock charts.
Swing and momentum traders are looking for the start of a strong run a few days to a week or two before the earnings release usually so they can take profits on the day of the earnings release.
So, how you approach a trading strategy is dictated by your particular trading style—the set of rules that provides the tone for ALL of your trading.
More Trading Strategies: Other Markets
Trading other markets can be considered trading strategies as well. There are many financial markets in which to trade according to your interests.
This trading strategy focuses on derivatives, usually just one, sometimes two. A derivative is a trading instrument that derives its value from an underlying asset, an asset with actual value like a stock. Exchange-Traded Funds (ETFs) fall under Derivative Trading; they are derived from indexes and funds. Exchange-Traded Notes (ETNs) are derived from bond or debt funds. Options and Futures are also derivatives; they can be derivatives of stocks, indexes, and more. Derivative Trading encompasses many different instruments and markets, so all of the trading styles can apply depending on which derivative you trade and how you want to trade it.
Options Traders buy and sell the option contracts on stocks, ETFs, etc. instead of buying or selling the stock, ETF, etc. outright for trading. You can trade weekly options with Swing Trading or typical options, which commonly have 3-month expirations, with Position Trading rules. LEAPS are long-term options that can be used for long-term styles.
Futures are another type of contract traded on commodity assets, but also on other trading instruments, such as stock indexes. This trading instrument is usually traded very short-term, so swing to intraday trading styles are used.
Those interested in trading E-minis should read this article.
Forex, which is the Foreign Exchange, aka Currency, Market is another trading strategy. It is done in an entirely different financial market—currencies—and has many additional forces to consider, such as foreign monetary policies, exchange rates, and much more. Most Forex trading done by retail traders is done on the shortest trend, so swing to intraday trading styles are used.
Trading Strategies & Trading Styles: Which is best for you?
There are many ways to trade or invest in the financial markets, of which the stock market is just one but also one of the most common, whether directly traded or through derivatives. Before choosing trading strategies to use for your trading, be sure to have the rules of your trading style clearly laid out so you have a guide as to which trading strategies to use and how to implement them.
Click a link on this page to learn more about the various trading styles and trading strategies.