The article is about different strategies employed by dealers involved in online stock trading and the effectiveness of the various strategies and how different strategies work for different people depending on their personality types, resources, and lifestyle.
There are two types who deal in the stock market: the fundamental investor and the technical trader. The fundamental investor studies the fundamental merits of the company, its management, and future growth prospects. They generally invest for the long term.
The technical trader, in contrast, relies on the technical charts of the company and trades on the price moments on the chart.
A trading strategy is a fixed plan that is designed so that a profitable return is achieved by going long (bullish) or short (bearish) on the markets.
- The strategy is based on predefined rules which help in making decisions while trading and these rules have to be strictly followed.
- The trading strategy is set using objective data and analysis and is followed to the last degree.
- Sticking to a proper trading strategy is crucial for long-term success in the stock market. A person remains focussed amidst the noise created by the continuous flow of news, which can affect your analysis process.
- Using a proper trading strategy helps in creating a statistical database after a considerable time and the success can be measured and efforts made to improve after doing an assessment.
- Emotions can be ignored and losses and profits can be booked at the proper time, ignoring fear and greed.
Following are the different trading strategies employed in day trading
- Momentum trading strategy
Here the trading is initiated when a stock is showing a strong moment in the short term.
For example, when a stock is in an uptrend, the stock is bought after the technical charts show a huge moment on the upside. News reports on the stock are often a trigger for the moment.
Similarly, when there is negative news about a company, a huge short position is created as the stock price is likely to fall.
Huge profits can be made if decisions are made promptly and at the right time.
- Reversal trading strategy
This strategy is for experienced professional traders and not novices.
The strategy is against the current market trend. For example, if the stock is in an uptrend, a bullish or buy trade is made in the stock.
A lot of technical knowledge and experience is needed to correctly identify the pullbacks.
- Breakout trading strategy
Here stocks, which come out of a trading range, are identified and entry is made. The breakout may be either in the upward or downward direction.
Exit is made when the breakout fails to happen. The expectations are the stock will touch new highs or lows in the case of breakouts. A huge rise in volumes traded is an important factor in determining whether the stock has broken out of its usual trading range.
D. Gap and Go trading strategy
It is employed when the stock opens with a sharp up or down moment during the start of trading. This happens when there is positive or negative news about the company before the start of trading. The expectation from the trader is that the gap will be covered during the day, and they can make huge profits.
E. Moving Average Crossover strategy
Various technical indicators are available online for professional traders.
Moving averages are available for 5 days, 10 days, 20 days and 50 days.
If a stock closes above the moving average, it indicates a bullish position, while if it closes below the moving average, it indicates a bearish position.
Traders make trades using the moving average.
Difficult trading strategies like reversal trading strategy should be used only by professional traders who have a lot of experience, skill, and knowledge. The breakout trading strategy in which the reaction to the news made quickly and profits booked fast. However, deciding the best trading strategy is difficult and there is no best fit strategy. It depends on the risk profile, age, resources, motivation, and available time.