Trading strategies are established approaches to trading, designed to give you the best chance of achieving a profitable return.
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Trading strategies for all traders
A trading strategy should suit your attitude to the markets. Before you settle on one, consider whether it works with your time available to trade, risk appetite and technical knowledge. Here are six strategies to consider.
Strategy 1: Day trading
The method of buying and selling assets within the same day. The main tenet of day trading is that none of your positions should remain open after the market closes, therefore avoiding the added costs and risks often associated with holding a position overnight.
A day trader will try to generate quick profits from small price movements. That means this type of trading is only really suitable for full-time traders, who have the time to pay constant attention to the markets. The main disadvantage is that this strategy can be very time consuming.
Monitor markets constantly, be prepared to make decisions quickly if a price moves in a certain direction. Price changes are normally as a result of news and being informed in good time is normally the key to understanding why a price has moved, allowing the trader to make a decision to either buy or sell an asset.
Guardian Stockbrokers can provide traders with our Breaking News Service to help you receive market moving news to your inbox or by telephone, in a timely manner, to help you make those decisions based on the latest information available.
Day trading examples
Day traders will typically trade assets that are volatile and move continuously, an example of this is trading index, commodity and forex contracts.
Day Trading is the buying and selling of a financial instrument on the same day in an attempt to profit in small changes in that instruments price. Traders will frequently use leveraged products to do this as it allows easy access to a broader set of instruments such as; index, forex, commodity and more recently the crypto-currency markets. Trading with leverage can help traders maximise gains but it can also result in substantial losses. Traders should always consider their knowledge, experience and risk appetite before considering trading CFD’s or Spread-Bets.
There are various short term strategies usually based on current market conditions and the time of day that can give traders the best chance of capitalising on market fluctuations.
How to identify promising day trades
A firm’s share price can be particularly volatile around an announcement, especially if the figures are better or worse than expected. If the earnings outperform expectations the share price generally rise, however if the earnings disappoint, the share price is likely to fall. Investors will use charts to determine how a firm’s share price has performed in recent weeks to establish what might happen after a company has announced results.
Here is an example. This firm announced results in Feb 2015 and they were worse than market expectations and the share price as you can see dropped significantly on that morning when the shares started trading post the announcement.
Data taken from a RIO TINTO chart dated 17/10/2015 to 01/03/2016 IG
Once the trade is placed the stop loss can provide some protection to the downside and guaranteed stops can be used to limit losses to a specific sum.
Strategy 2: Breakout
A breakout occurs when a share price breaks through a defined support or resistance level. A support level is where a share price has shown a tendency to bounce back and the resistance level is where the price has shown a tendency to rebound towards the down-side. Once the price moves beyond one of these barriers the market will tend to become more volatile and the price should continue along the directional trend. Below we have a chart showing an example of a breakout above resistance. This chart below shows the price for Vodafone
Strategy 3: Technical indicators
Stochastic Oscillator – This indicator reveals if a price has undergone an extreme move and may potentially reverse in the short term. This indicator shows where an instrument might have been oversold or overbought suggesting that a price reversal might be about to occur. You will see from the chart below there are two points, for both overbought and oversold, with prices moving in the opposite direction once the indicator shows these readings. Using stop losses will help to reduce losses should the technical indicator turn out to be incorrect, for example when a share price experiences a “break-out”.
Data taken from a VODAFONE chart dated 11-04-2014 to 19-12-2014 IG
Remember that these examples are simply a guide and offer no guarantee that the prices will move in a predicted direction. You should be aware that losses can exceed deposits and the use of guaranteed stop losses and non-guaranteed stop losses can help to reduce losses.
Strategy 4: Position Trading
Position trading involves holding onto a particular asset for a longer period of time. This can be for several days, weeks, or even longer.
Position traders will make far fewer trades than day traders, with each trade carrying a greater potential for profit. However, holding a position for a long time can also increase the inherent risk. Position traders might take a position in a stock before or even after a critical event, such as a quarterly or interim statement announced by a particular company. This is typically when the market might see the largest price movements also adding to the risk of the trade.
Strategy 5: Trend Trading
Trend traders attempt to profit from market trends. Traders will analyse the price of an asset by studying a chart to determine if the asset is an upward trend or a downward trend. Positions are kept open as long as the trend continues, meaning that trend trading can be a short, medium, or long-term strategy. Stop losses and guaranteed stops can be used to protect profits/reduce losses should the trend fail to continue. You will need a good platform that is able to offer these types of stops to help reduce your risks. A trader might go long in an upward trend or take short position if the asset is in a declining trend.
Our platform can provide stop losses and give you peace of mind by using guaranteed stop losses.
Strategy 6: Swing Trading
Heavily focused on technical analysis, swing trading involves finding short-term trends and price patterns to trade. Swing traders tend to focus solely on price, paying less attention to value when finding an asset to trade.
Positions can be held from one to several days: longer than day trades but shorter than position trades. And swing traders will sometimes trade against the trend, if their analysis shows an opportunity. Your platform should have a good charting package to help traders spot changes or technical movements in the price of an asset or even offer alerts when certain technical criteria have been met. For example a trader may wish to take a short position when a short term moving average crosses a longer term moving average to the down side. Clearly monitoring this type of action can be time consuming, however there are platforms that are sophisticated enough to alert the
trader when this price action occurs, allowing the trader to take a position before it is too late.
Swing Trading requires some understanding of technical analysis – Guardian Stockbrokers can provide support to traders with varying knowledge levels to help them understand and recognise patterns and trends and how to set up your platform to provide alerts.
Strategy 7: Dividend trading
Most UK listed companies pay dividends to share-holders throughout the year. There are two key dates here; the ex-dividend date and the dividend payment date.
The Ex-dividend date is when a company's share price should reflect the drop in price equivalent to the value of the dividend. An investor that holds a CFD/Spreadbet position in a company going ex-dividend will receive a payment equal to the dividend on the same day before the market opens.
The Dividend payment date is when an investor holding shares in a share trading account. will receive payment for the dividend. This might be a few days to a few weeks after the ex-dividend date.
Why trade CFDs/Spreadbets for a dividend?
Whilst trading with leverage is risky, there are some advantages to trading them to receive a dividend.
No stamp duty - means lower costs.
Many investors will follow ex-dividend stocks and buy and sell multiple times throughout the year - allowing you to move your money around to take advantage of multiple payments. This is done by buying and selling the positions at the same price.
There is no delay in receiving your dividend.
Using leverage means that you don't have to invest the full amount of your exposure allowing you to look at other opportunities without tying up all your many in one position.
Investors can also buy the UK FTSE100 index contract and also receive a dividend payment at 16:30 every Wednesday when shares in the index are going ex-div.
Investors can use the same strategy with a share dealing account. You will simply have to have the full amount you wish to invest in the account before you trade and wait for the dividend payment date to receive your dividend.