How to Choose the Profitable Trading Strategy for You?
Last week has been full of major events, each of which has shaped the market in one way or another. In this relaxing weekday read, we want to refresh your knowledge of trading strategies: different styles of trading can be used to take advantage of different market conditions, and each style has its own pros and cons. What types exist? How do they apply to what happens in the real world? We'll use some past events as examples.
Today we're going to classify trading strategies into these categories: scalping, day trading, swing trading and position trading. The criterion for classification is therefore the duration of an order (i.e., the time that a particular trade was opened) and we'll discuss them one by one, starting from the fastest to the longest.
Scalping is a trading style that involves taking positions that are held for a very short period of time, usually a few minutes or seconds. In this sense, it is a sub-category of the more general term 'day trading'. This style is attractive to traders who want to capitalise on very short-term price movements, but who are also prepared to accept a higher risk of loss due to the extremely short holding period.
For example, news of a large change in US oil and distillate reserves, or rumours of another American bank going bankrupt, can cause instant price spikes that are so popular with scalpers.
Day trading is a popular style of trading that involves taking positions in the market and closing them out within the same day. This style is attractive to many traders because it allows them to take advantage of short-term price movements and capitalise on intra-day volatility. The main advantage of day trading is that it requires less capital than other styles, as positions are closed out within the same day. However, day trading also carries a higher risk of loss due to the short-term nature of the trades.
A good example of day trading news is when a public company announces the size of its dividend. Higher/lower than expected results can cause significant movements in the company's share price, but these can be normalised within a day or two.
Swing trading is a strategy that involves holding positions for a few days to a few weeks. It is less time-consuming than day trading and requires less technical analysis skills, but it still requires traders to monitor the markets on a regular basis. The advantages of swing trading include lower transaction costs and the ability to make larger profits by holding trades for longer periods of time. However, the risks are higher, as market trends can change quickly within a few days.
Musk's infamous purchase of Twitter is a textbook example of this: those who were quick enough to buy the shares after the deal was announced caught several weeks of rising Twitter share prices.
Long-term trading involves holding onto positions for months or even years. It is the least time-consuming strategy and requires less monitoring of the markets, making it suitable for traders who have other commitments. The benefits of long-term trading are that it spreads the risk over a longer period and can result in larger profits. However, the drawbacks are that the profits may take longer to materialize, and traders need to have a lot of patience.
In this case, grains and foods are the most suitable example: considering the ever-growing population of the Earth, famine issues worsen every year and foodstuffs will always rise in price in the long run.
To sum up, each strategy has its own benefits and drawbacks, and traders need to choose the one that suits their personality and goals. To add more tools to your future decision-making, join our official Telegram channel and check the Analysis and Daily Reviews section on the website!
