Trading Strategies (35)

Trading strategies are typically designed on the investment objective and could vary based on the investment type – Active or passive. While the former involves holding positions for shorter periods, the latter is generally for long-term investors. Here are some ways to create trading strategies for various trading/investment types:

1. Scalping – Since the strategy is to profit from small price gaps in the bid-ask spread, the key is to identify liquid assets for speedy entry/exit.
2. Day trading – Here, the idea is to enter/exit a trade by the end of the day’s session. So, the strategy would be to look for short-term breakouts on momentum stocks.
3. Swing trading – The short-term strategy involves identifying a range-bound market to capture a swing (from the low to the high or the other way around) or wait for a breakout to enter.
4. Positional – These are trend-following strategies that last from a few weeks to a year. The strategy involves going long/short in an asset when prices close above chart resistance or below support correspondingly and holding on to the trade until you meet the target.

There are two ways to backtest a trading strategy:

1. Manual backtesting – To backtest a strategy manually, include indicators or drawing tools to the chart. Next, manually scroll the chart to the period from where you’d like to backtest. Finally, go forward one period at a time to see how your strategy has performed.
2. Automated – Here, the strategy is to enter/exit trades automatically by using a software program. Automated backtesting via expert advisors (EAs) or trading robots is the preferred method not only to verify the potential outcome of a strategy but also to monitor several other trading parameters.

One of the simplest intraday trading strategies is the pivot points. The formula is the sum of the market high, low and closing prices during the previous session. In other words, Pivot (P) = (High + Low + Close)/3. While you can use pivot points across various timeframes, for intraday strategies, it is best to plot it on daily prices. Pivots generate three supports and three resistances

1. Support 1 = (2 x Pivot Point) – High; Resistance 1 = (2 x Pivot Point) – Low
2. Support 2 = Pivot Point – (Resistance 1- Support 1); Resistance 2 = (Pivot Point – Support 1) + Resistance 1
3. Support 3 = Pivot Point – (Resistance 2- Support 2); Resistance 3 = (Pivot Point – Support 2) + Resistance 2