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A Glimpse at Some Common Types of Trading Strategies27 February 2020

Anyone who has some experience in the world of trading would tell you that there is no one fixed formula for trading assets. Anyone looking for specific formulae in trading would soon realize that the requirements and trends in the stock market are extremely transient, and a trader has to adapt to this fluidity to stay on top of the game in equity trading.
Different traders may apply a plethora of trading strategies as applicable in the situation. Here, we bring to you some common types of trading strategies that traders have commonly applied over the decades and centuries in the course of their trading journeys:


1.     Position Trading


Position trading is a strategy wherein the trader holds a derivative or asset for a span of time, waiting for its market value to increase. Typically, the timeframe for which traders may hold on to the investment may range from a span of some weeks to a few months, depending on the value of the asset or derivative. This strategy typically works if a trader is certain that the value of the security is likely to increase over a relatively short period. However, s/he may also have to undertake risks if the value depletes over time due to an unexpected change in trends or a sudden market crisis.

 

2.     Day Trading


Day trading is one of those expert trading strategies in which one carries out the entire trading process (i.e. buying and selling of the asset or derivative) within one trading day. While the process ostensibly appears simple, day trading requires a fair amount of trading experience and the skills to carry out extensive share market technical analysis before plunging in. For this reason, many day traders make use of software tools and advanced strategies like back-testing of stocks, to gauge their past performances and predict their values accordingly. Day trading may be a useful strategy if a trader has reason to believe that the value of the asset or derivative may plummet in the near future. Short selling also acts as a hedge against inflation and any other negative trends predicted in the market for the days or weeks to follow. However, this strategy is not without substantial risks, and the way forward is to study the value of your asset or derivative before day trading.

 

3.     Trend Trading


The stock market is laden with trends and fluctuations; trend trading, as a strategy, taps on this factor to earn profits. Simply put, a trend trader would evaluate an asset or derivative’s current trend and take a long or short position accordingly. For instance, if a stock shows a growing trend in terms of its value, the trader may purchase the stock and hold on to it with the expectation that its value would increase over time.
On the other hand, if the value of the asset or derivative shows a diminishing trend, s/he may short sell the same to avoid incurring any further losses. Trend trading is a reliable strategy and financial planning technique to systematically evaluate stock performance and then follow the necessary course of action. However, unexpected fluctuations in trends due to several unforeseen factors may have adverse effects.

 

4.     Swing Trading


Swing trading, as a strategy, is essentially similar to trend trading, except that it is a much more short-term strategy. Typically, swing traders also plunge into trading by observing the trends of the asset or derivative concerned, but they do not hold the stock for more than a few weeks. Then, based on the upward or downward trends of the asset or derivative, they buy or sell the same to earn profits or prevent further risks. Swing trading is often perceived as a blend between day trading and trend trading.

 

5.     Scalping

Scalping is all about making the most of minor fluctuations in the trends rather than holding on to the asset or derivative until a more apparent change comes up. Typically, traders engaging in scalping simply purchase the asset or derivative at its bid price and sell it at its ask price in an attempt to earn profits afforded by the difference between these two amounts. Scalping essentially functions on the motto of “carpe diem” or seizing the moment based on the smaller trends than planning the trade for a specific point in the future.


Conclusion

While the above-mentioned trading strategies are some of the most common ones in the trade market, trading by itself is a very broad domain that cannot be bottled down into very specific strategies. What works best is to carefully study the current trends and predicted performances of the asset or derivative concerned and make an informed trading and investment plan based on the trend and your personal trading experience and knowledge. Click here to kick-start your trading journey with some sound advice and professional trading guidance!

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