Traders deploy a wide array of strategies to squeeze profits while buying and selling securities in the capital markets. Most of the strategies are time-based, with some geared towards taking advantage of short-term price movements as others seek to take advantage of long-term price movements.
Regardless of the trading strategy deployed, the goal is always to determine the best entry and exit point, crucial to squeezing maximum profits from the markets. That said, there are four main trading strategies that active traders use in the financial markets.
Scalping is a popular short-term trading strategy that involves opening and holding trades for a few seconds or minutes at most. This trading strategy seeks to take advantage of small price movements and allows traders to make many quick trades throughout the day.
A typical scalping strategy will see a trader entering a long position as soon as the price starts trending higher. Conversely, when the price reverses and starts dropping, a trader would close the position and open a sell position. A trader will repeat this process throughout the day in a bid to accumulate small profit gains.
Scalping is an ideal trading strategy when dealing with liquid markets that allows one to open and close trades at desired price points. Consequently, traders tend to deploy this strategy on the major currency pairs such as EUR/USD, GBP/USD, and USD/JPY.
Day trading is a trading strategy for traders who do not have the stomach to engage in high-speed trading, as is the case with scalping. Day trading allows traders to enter and close positions before the end of the day, just like scalping. However, traders do not open as many trades, as is the case with scalping.
With day trading, traders study price movements and patterns to enter trades with a view of closing them before they go to sleep. In order to hold trades for minutes or hours, traders carry out sufficient analysis to detect potential price movements.
Day traders carry out fundamental and technical analysis and rely on technical indicators such as MACD and RSI to identify trends and market conditions.
Swing Trading is the opposite of scalping and day trading. The trading strategy involves traders holding positions for several days and at times for weeks. While trades are held for days, traders do not need to monitor charts or trades continually.
Swing trading is an ideal trading strategy for people who have full-time jobs or other commitments. With swing trading, traders tend to engage in trend trading, which involves opening trades in the direction of a trend and trying to ride the trend. Likewise, the traders can engage in breakout trading.
Position trading is a trend following trade strategy that sees traders trying to take advantage of long-term price movement. Position traders use weekly and monthly price charts while analyzing and evaluating the market. Likewise, they hold trades for weeks or even months while trying to ride an underlying trend.
Unlike scalpers and day traders, position traders are not concerned with minor price fluctuations as they focus on the prevailing long-term trend.