What are the trading strategies?

Trading strategies are methods that we use to buy and sell in markets. They consist of rules and plans that one must understand when making trading decisions.

A Trading strategy usually has three stages:
Planning
placing trades
Execution

The planning phase includes developing methods for buying or selling stocks, bonds, ETFs or other investments. It can even extend to more complex trades such as options or futures.

The placing trades phase includes working with a broker or a broker-dealer to identify and manage trading costs including spreads, commissions, and fees.

The execution phase includes executing trades, monitoring and managing trading positions. It further comprises adjusting or closing them as needed.

If you are trying to ‘beat the market average’, active trading is a common strategy that is used. It is based on buying and selling securities on short-term movements for profits from price movements looking at market trends.

Many believe that this method is the best way to earn profits.

Types of active trading

Day trading

Day trading is one of the most common and well-known methods. It is often used by professional traders like market makers or other specialists. However, nowadays, with electronic trading, many novice traders use this strategy as well.

As the name states, it is a method of buying and selling securities within the same day. The idea is to profit from small fluctuations in the price within the day. However, it is quite risky in comparison to other strategies. All positions close before the market closes within the trading day and so nothing is held overnight.

Position trading

Position trading is mostly known as a buy- and -hold strategy than active trading. This is because the trades holds the position of asset for a particular period. This time period can be anything from days to years. It is often called the opposite of day trading as it can hold on for many years.
Position traders need not worry about small fluctuations and they usually jump when the trade establishes. In the event the trend breaks, traders usually exit the position.
If you are very patient and long-sighted, this is an option for such traders.

Swing trading

Swing trading is a more speculative form of strategy in active trading. They usually look through fundamental analysis and create trading rules. They hold tradable assets from one day to several days to make profits from swings in prices.
However, they also make use of technical trading analysis as well to identify the overall trend and capture gains.
If the security is bent more towards an uptrend, traders will go along and buy shares. However, if it goes down, he could shorten shares or make use of buy put options. Yet, just like day trading, there is a higher risk when using this method as well.

Scalping

Scalping is another strategy where traders can profit from small minute price changes. It is a very quick strategy as the positions are held for shorter periods. It is based on a bid-ask spread. This basically means that traders buy at a bid price and sell at ask price to see the difference between the two points. However, since profits are quite small, generally look for liquid markets to increase frequency.
Unlike swing traders, scalping traders get sudden rapid profits so they can spread based on bid/ask prices.
It is, however, a very profitable strategy and can be used as a primary method for many traders.

Inherent costs

Trading costs are one factor that reduces advantages to many traders. To improve profit, there should be lower commissions. This is why active trading is usually done by professional traders as they can execute better. Traders must buy necessary hardware and software to implement these strategies and these conditions make it very unfavorable for individual traders.
Although passive strategies have lower fees and trading costs, it cannot beat the market. This is why many traders seek active trading strategies to gain profits with a mere hope that someday, profits will exceed the costs.

A final note
Active trading strategies can be implemented by any trader if willing to bear the costs and face the potential risks.
Active traders can use any of the strategies that are mentioned above. However, before deciding on engaging in any of these strategies, the risks, and costs that are associated with each one need to be identified and understood.