Trading is a profession unlike any other.
A look into this craft proves that it is much more complex and intricate than the stigma it commonly receives from the public.
There are different types of traders – scalpers, day traders, swing traders, and even position traders or holders. Not to mention the different technologies these traders can leverage, such as an auto trading bot.
Then comes the strategy, perhaps the most challenging part of becoming a successful trader.
Just as there are different types of traders, when it comes to strategy, there are many.
There is no right or wrong strategy – (as long as you’re making and not losing money, right?); at the end of the day, it comes down to preference and comfort.
From trend trading to range, breakout, reversal, momentum, and even arbitrage trading, each type brings its own set of rules and ideology based on specific data points being met.
Trend trading, or rather “trading with the trend,” is quite simple in definition. The “trend” is the direction or narrative the stock is currently following, and the trader will execute trades based on that narrative.
For instance, if a stock has been trending upwards and is setting higher highs and higher lows and turning previous resistance into current support on the way up, a trend trader would likely buy on price dips and sell on price swings to the upside.
While traders experiencing the same price movements may be spooked out by the price fluctuations, especially the dips, the person trading and respecting the trend knows they can exploit and profit off these movements until previous support is broken and flipped to resistance.
Remember, “The trend is your friend until the end.”
Find Your “Range”
Range trading can be seen as similar to trend trading as, technically, if an asset is trading within a specific range (bouncing off both lower support and upper resistance), it is in a trend.
However, with range trading, the trader is aware ahead of time, of both the support and resistance levels, unlike trend trading, where one is waiting for new supports and resistance levels to be set in real-time.
For instance, if an asset is trading tightly between the levels of $1 and $1.10, consistently finding support at $1 but always getting rejected once it reaches $1.10.
In reality, what may not seem like much is “almost” the sure chance to take advantage of 10% price fluctuations to both the up and downside.
Buying the asset as close to $1 as possible (as long as it doesn’t fall below) and selling it as close to $1.10 would be trading the range; however, once the support or resistance is broken, the range would be invalidated.
Breakout trading is waiting for the moment a stock breaks out of a specific range to begin trading – usually buying the asset upon breakout with the intent to sell once it hits future resistance.
Using our previous range trading scenario as an example, where the stock is trading between $1 and $1.10, the buy signal to the trader would be once the stock broke past $1.10.
There are additional layers or analysis metrics instead that traders use to help confirm whether this is indeed the right buying opportunity or not.
Usually, this comes in the form of additional confirmation, such as the stock breaking past $1.10, then retracing back down, and using $1.10 as support instead of resistance – otherwise known as a “cup and handle” formation.
Trading once there is a change or reverse in trend would be reversal trading.
In our trend trading example, the asset consistently set higher highs and higher lows. Using that same scenario, a reversal trader may look for the moment where a new higher high is not set and go one step further, waiting to see if previous support is broken and now flipped to resistance.
In this case, the stock is no longer setting new price highs, and there has been a trend reversal to the downside.
As with the other strategies, a wise trader would again wait for confirmation to prove that the trend has indeed reversed.
Momentum trading is similar to trend trading, except that momentum can change multiple times within a single trend, especially when longer chart time frames are applied.
These traders are constantly adjusting their strategy so that it flows with the momentum and not against it.
For instance, if an asset is in a clear upward trend but then starts to retrace, although the trader may be overall bullish on the asset long-term, they will begin to trade in favor of the retracement and not against it.
Should or when the momentum flips back to the upside, the trader will adjust their strategy again to support a “bullish” case.
Out of all the trading strategies covered, arbitrage trading tends to be the least technical. While trading, in general, is risky regardless of what strategy is being applied, arbitrage trading has less to do about charts, analysis, and price movement, removing “most” of the risk factors.
The art of arbitrage trading lies in capitalizing on price differences for a said asset across multiple markets or exchanges.
Let’s say you have two different exchanges where the same asset is priced at $1 on exchange A and $1.10 on exchange B.
An arbitrage trader would identify and capitalize on the 10% price difference by buying the asset on exchange A and immediately transferring and selling it on Exchange B to realize a quick 10% profit – rinse and repeat.
Choosing the right strategy for you comes down to trial and error – applying different strategies, seeing which one best resonates with your trading style, and adapting and adjusting them as you gain experience.
While there is again no wrong strategy, as long as it works for you, remember to keep an open mind and be willing to try, test, and even test strategies as you go.