An active trader’s outlook is based on the assumption that intraday price trends offer enhanced profit potential that is capable of benefitting from positive and negative price trends. However, various strategic methods can be used to design a successful approach to active trading in the financial markets. Here, we will look at some of the different asset classes that can be traded and highlight relevant factors that should be considered when designing a method to profit consistently when trading.
Establish Consistent Trading Plans
Expert traders know that implementing a solid trading strategy can help remove unnecessary emotions from our investments. This is why it’s often said that “failure to plan is a plan to fail.” Any unwillingness to obey a consistent trading plan is a mistake that can quickly result in losses that come as a result of bad decision-making.
There are five key elements to consider when defining a successful trading strategy:
Asset Classes: The term “asset class” simply refers to the type of instrument you will be trading. Popular examples include CFDs, cryptocurrencies, foreign exchange (forex), commodities, stocks, and options.
Trading Style: What’s your trading style? Common choices include swing trading, day trading, scalping, position trading. Deciding on the best approach depends on how much time do you have to devote to trading activities each day. For example, scalping strategies are very different from swing trading strategies, so it’s important to know what you want to accomplish before you commit to any single approach. Knowing your true trading personality means understanding your limitations as well as your strengths.
Time Horizons: To construct an active trading strategy, you must select a time horizon upon which to base your position. Trading strategies that utilize 5-minute charts tend to differ from strategies that base position stances on weekly charts. Traders must be able to access charts reflecting each specific time period and these can be found via the software platforms made available by your market broker.
Technical Charting Tools: Always know what’s available in your trading toolkit. Nearly all of today’s best trading strategies involve charting and technical analysis, so figure out which indicator tools you plan to use and which price patterns you feel you can master.
Risk Management: Know common risk management techniques. Develop position size based on clearly defined risk/reward ratios and set strict rules for how much capital you’ll risk on each individual trade. Understanding the proper ways to use strategic stops can help to prevent catastrophic losses in the future.
Stock Trading Strategies
Equities market strategies are suitable for both long-term “buy and hold” investors and short-term traders. Depending on which you are, you will always be able to find a wide variety of tools available to help you develop a successful strategy.
Stock Fundamentals: Many stock traders use fundamental analysis techniques to identify equities that fit a particular style of investing; typically those that are undervalued based on their fundamentals, those that provide good dividend income, or stocks with the potential for long-term growth in value over a particular timeframe. There are literally hundreds of thousands of stocks available in the equities market, so stock picking strategies are extremely important.
Screening Tools: Finding specific companies that fit your trading style and meet your investment objective might be perhaps the hardest part of the job for any stock trader. Common screening metric include figures like the price-to-earnings ratio or price-to-book value. Be sure to choose a broker offering superior stock screening tools that enable you to compare a company to peers in its industry sector and against the trends seen in the broader market.
Market Liquidity: Intraday trading requires precise timing of position entry and exit points. Typically, it’s much easier to get in and out of stock positions at a preferred price when high trading volume is present. It’s important to consider market depth, as well—what’s the liquidity at different price points (above and below the current market price)? The answer to this question can help determine which stocks we best-suited to new trade entries.
Price Volatility: Stock positions need price movement in order to generate gains, so equities traders often look for stocks that make consistent price moves of at least 3%-4% each day. Depending on the stock’s share price, these moves can produce substantial profits or losses, so always adjust your position size based on the relative value of current market prices.
Crypto Trading Strategies
Traditional investors often argue that cryptocurrencies qualify as the riskiest and most volatile asset class. Currently, the cryptocurrency market is poorly regulated, contains assets with no intrinsic value, suffers from thin order books and a lack of institutional investment, and is highly susceptible to hacking. In other words, if there’s any market that requires a tested and disciplined trading approach, it’s crypto.
Most cryptocurrencies trade against bitcoin (as opposed to a fiat currency). Given the fact that bitcoin is extraordinarily volatile, market experts often argue that developing a consistent crypto trading strategy is even more difficult when compared to the other major asset classes.
A crypto trader’s first step is to choose the proper trading vehicle. For anyone that doesn’t want to deal with the hassle of obtaining a digital wallet and holding the actual digital currency, there are cryptocurrency options, crypto futures, and crypto CFDs. One of the main challenges with crypto trading is that it’s still a relatively new development in the world of finance. New ICOs continue to happen all the time—and cryptocurrencies disappear regularly. Moreover, cryptocurrencies tend to have low trading volumes, so liquidity is another issue to consider.
Common elements of a successful cryptocurrency strategy include:
Asset Diversification: Trading different cryptos reduces the risk associated with any specific coin.
Minimize Trading Costs: Select a broker with low fees; most crypto traders open and close multiple positions a day.
Technical Analysis: Test trading strategies using different technical indicators. Using at least two technical indicators can help confirm trading signals as they develop.
Risk Management: Set stop losses at a price level that creates a profit ratio of at least 3x on each position. Given the enhanced volatility seen in crypto markets, stop losses are an absolute requirement on every trade.
CFD Trading Strategies
Contracts for difference, or CFDs, are derivatives—in other words, the instrument derives its value from an underlying asset. Rather than owning the asset, CFDs make it possible to profit from price movements seen in its underlying value. CFDs are also leveraged instruments, so trading strategies must include the use of protective stop losses.
Successful CFD trading strategies include several essential parts:
Leverage Control: Leverage of 50:1 is not uncommon in the CFD market. As a result, the market’s outsized profit potential is extraordinarily tempting to novice traders. However, the potential for loss is equally great—and no one wants to deal with margin calls on trades that go bad. Start small and limit your exposure; new traders shouldn’t employ leverage beyond 3:1 during the first year of trading.
Capital Preservation: Most CFD traders focus exclusively on making money. But it’s equally important, if not more so, to focus on protecting available capital. All trading strategies need tight stops, but it’s especially important for leveraged instruments. On a long enough time horizon, any trading strategy without a stop loss is destined for failure.
Macro Analysis: CFDs are available in many different asset classes and this requires an understanding of macroeconomic analysis. For example, if you’re not an expert on the ways commodities prices respond to inflation, your success rate trading commodities CFDs may be hampered. When you are just starting out, stick to asset classes you know best.
Forex Trading Strategies
Forex traders speculate on upcoming price movements in foreign exchange markets. Currencies trade in pairs; the top currency pairs are euro/US dollar, US dollar/Japanese yen, British pound/US dollar, US dollar/Canadian dollar, Australian dollar/US dollar, US dollar/Swiss franc. Forex markets are active 24-hours a day and represent the world’s largest forum for active trading. As a result, forex is ideal for traders who want to trade outside normal business hours.
Forex is also particularly well suited to scalping; you can move in and out of the market many times a day and profit off tiny movements, or pips, in currency prices. Of course, scalping requires a larger time commitment when compared to other popular trading styles (i.e. position trading or swing trading). You can trade forex on the options futures or spot market. Each venue offers specific advantages that may help to determine your ultimate trading strategy.
Successful forex strategies generally include these elements:
Time Horizon: Do you prefer to be working with 5-minute charts, hourly charts, or daily charts? In other words, what’s your trading style? Different types of forex strategies tend to work best on specified timeframes.
Technical Indicators: Technical indicators help forex traders to identify a trend direction. This is why all-purpose tools like MACD, stochastics, and moving averages can be an invaluable component for any forex trading strategy.
Entry and Exit Points: Forex traders must identify price levels that determine to enter and exit the trade—and set stops to ensure you follow through.
Backtesting: Trade your new strategy on a demo account to make sure it works before applying it to your live account.
Options Trading Strategies
Options give the holder the right (but not the obligation) to buy or sell a particular underlying instrument at an agreed-upon price up until a preset expiration date. Options traders have access to a wide variety of underlying assets (equities, indices, ETFs, forex, commodities, crypto, futures, and other derivatives).
Options are leveraged instruments, so trading strategies must protect against the risk of potentially limitless losses. Options trading techniques range from basic strategies (i.e. buying calls and puts) to more complex protection and enhancement strategies.
Generally, options strategies fall into one of four categories:
Calendar Strategies: Capitalize on the advantages of time decay. These strategies are complicated and highly variable, so strategies must be monitored closely (and are often closed-out manually).
Vertical Strategies: Initiate small bets on a large market scale. An options trader sells puts at a lower price and simultaneously buys puts at a slightly higher price while collecting the premiums.
Enhancement Strategies: Allow options traders to profit assets that are already part of an investment portfolio. By writing covered calls or covered puts, options traders keep the options premium—and if the predictions are correct, you keep the underlying assets, too.
Protection Strategies: Hedge against risk within an existing investment portfolio. For example, if you’re long on a stock and you want to protect your profit (or if you believe prices will reverse), buying protective puts can help to lock in gains should your predictions prove correct and prices move against the position.
Once you know the objective behind your options trading, your next step is to determine your risk tolerance. The riskiest options trades include buying a large quantity of deeply out-of-the-money (OTM) options contracts or writing naked calls.
Demo Accounts: Trading Strategy Backtests
Backtesting involves using historical data to recreate trades that would have occurred in the past. Whenever traders are adopting a newly developed trading system, expert traders consider backtesting an essential part of the process in crafting an effective strategy. Backtesting is a statistical analysis that employs specialized backtesting software. Before deciding to backtest a trading strategy, keep the following tips in mind:
Test Different Time Periods: Make sure your strategy works in both bear and bull markets. Additionally, gain/loss metrics can help traders narrow down optimal position sizes within the strategy.
Assess Risk: Trading systems are only effective if they can outperform other investments at or below an equal level of risk. Fine-tune your backtesting by mimicking commissions, fractional lots, margin requirements, trailing stops, and tick sizes to get the most accurate results while minimizing risk.
Beware of Over-Optimization: When results are tuned too tightly into the past, they may not work in the future. Backtesting isn’t always 100% accurate, but as one more tool in the evaluation arsenal, it can help you determine if your new trading system is capable of achieving your investment goals. Always test a backtested strategy with a demo account before taking it live.
Algorithmic Trading Strategies
Automated trading systems (also known as algorithmic strategies) allow traders to use software programs to set predetermined price parameters for trades. Once activated, trade execution is handed over to the system’s algorithms. In most cases, traders will establish a set of rules for specific technical indicators, input order types, profit targets, and stop loss parameters and the system’s trading “bots” will execute trades once all of these criteria are satisfied.
Advantages of algorithmic trading systems:
- Objective positions and enforced discipline
- No need to actively monitor trading stations
- Increased order entry speed
- Remove emotions from trading decisions
- Superior trading consistency
Disadvantages of algorithmic trading systems:
- Requires extensive backtesting
- All positions stop if trading platform loses connectivity
- Difficult to monitor trading losses
- Rarely successful on first attempt
74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.
74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.
74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.
Conclusion
In order to achieve consistent success, having an active trading plan is absolutely essential. The rules of a successful system should be honored and obeyed, yet open to flexibility and reevaluation should market conditions call for adjustments. A practical trading strategy takes into account each trader's personality style, risk tolerance, and individual investment goals. The ability to know when to close a trade is as vital as it is to know when positions should be opened. Stop loss levels and profitable price targets should be included as part of every trading plan in order to ensure proper risk-reward parameters are in place.
If any trading system lacks preparation or employs flawed techniques, long-term success is unlikely. However, when implementing the proper research and forethought, anybody can develop the skills required to beat the market and achieve strategic results that are consistently profitable.