- Trading success depends on a sound and sustainable strategy
- Different strategies suit different traders, so take time to figure out what works for you
Why Trading Strategies For Beginners Matter
You’ve chosen your broker, you’ve researched your assets, and you’ve even deposited your precious capital. You’re ready to trade, but you need a plan.
Successful trading is impossible without a sound strategy. It may be possible to strike lucky on a number of occasions, but random and impulsive trading is a recipe for disaster in the long term.
Unfortunately, there are no universal rules when it comes to trading, and there is no one-size-fits-all solution for success. In actual fact, the secret to success is figuring out what works for you and how you can develop a plan for continuous and sustainable progress. We’ve highlighted 5 very different but equally viable trading strategies for beginners to help you decide what fits your trading personality and goals.
Being a Beginner Trader, How to Choose Your Strategy
Everything about trading is personal. Between your choice of broker, your assets, your capital, and your strategy, you can guarantee that your trading journey will be different to anyone else’s. It follows that your trading strategy should be tailored to your specific needs, and not simply copy-and-pasted from an online trader!
First of all, you need to consider the resources you can commit to your trading, because these will dictate exactly what is and is not feasible in your trading routine.
- Time – how frequently are you planning to trade? How much time can you commit to monitoring the charts? Will you be trading multiple times per day, once a day, or less?
- Capital – your trading capital should always comprise funds that you are prepared to lose. How much money are you willing to set aside for trading?
- Internet Access – do you have secure and consistent access to monitor your trades? Or is your screen time limited?
- Brokerage – your broker is your key to the markets, so choosing the right one for you is crucial. Does your broker offer the assets you want to trade? What trading conditions and leverage does it offer? And can you count on your money being handled safely and efficiently?
Secondly, you need to address your “psychological resources.” How much risk can you stomach on a regular basis?
Your risk tolerance depends on your personality; this is another reason why strategies that work for some do not work for others. Trading can be stressful, so it is important to be honest with yourself about the level of pressure you’re willing to work with. Further, subjecting yourself to too much stress too soon or too frequently will only lead to trading burnout. To avoid this, you need to choose a strategy that is sustainable for you mentally as well as monetarily, and consider outlining your risk-reward ratio as soon as possible.
According to your answers to the above, you should be able to identify which of these common trading strategies could suit you.
Scalping is the fastest and most furious trading stratagem. Traders place fast, frequent trades that last mere minutes or even seconds, and seek to take profit from every price movement or fluctuation. Fundamental analysis is generally put to one side as traders focus on the charts and technical indicators to tap into the slightest trade signals.
Not for the faint-hearted, scalping demands constant monitoring of the markets and careful risk management. As a result, prospective scalpers need a secure internet connection and a level of technical competence when it comes to reading charts. With hours spent poring over a screen, scalping can potentially take its physical and mental tolls, so scalpers need to be patient, consistent, and able to cope in high-pressure situations. Whilst small profits can build up over time, a single lapse in attention could cost everything.
Further, traders must choose a brokerage account that accommodates scalping and will not allow costly commissions or frequent slippage to eat into profits. Generous leverage is also a bonus for scalpers because it amplifies profit from the smallest of pip movements.
Overall, scalping allows for frequent market exposure, practice, and profit. It also has the advantage of being applicable to any market at any time because it doesn’t rely on big trends.
Consider scalping if: you’re technically inclined and like the idea of constant trading.
If you like the idea of daily trade activity but can’t commit the hours for scalping, you might consider day trading. Under this strategy, positions are held no longer than a single trading day, and target price short-term price movements in highly liquid assets (such as major forex pairs). So technically, scalping is a form of day trading.
Unlike scalpers, other day traders may use fundamental analysis to find clues on upcoming price action. For instance, day traders can capitalize on volatile price movements on the days of major economic announcements. This means that they have more notice than scalpers to plan their trades, but may place fewer orders during a session.
Consider day trading if: you’d like the flexible and dynamic principle of scalping, but not the hours.
Swing trading is a medium-term strategy that sees traders hold positions over days or weeks. This strategy targets price reversals and temporary reversals, regardless of larger ongoing trends. It attempts to make a virtue (or profit) of the fact that price trends do not move in straight lines.
Simple technical analysis and chart pattern-reading will help traders spot ‘swing’ opportunities. This includes, for example, the ability to plot support and resistance lines and identify prominent candlestick reversal patterns. Fundamental analysis is less important for swing traders because they are more concerned with fluctuations than overall trends.
Since swing traders can hold positions across multiple trading sessions, they risk exposure to rollover charges or market gaps. With this in mind, stop-losses, trailing stops, and take-profits are key to containing risk.
Consider swing trading if: you enjoy the buzz of the markets, but you’re not able or willing to trade every day.
Trend trading is a versatile strategy that can be applied over different market time-frames. This is because trends can last anything from hours, to days, to weeks, or even months.
Like swing traders, trend-spotters will use support, resistance, and trend channels to monitor price patterns. However, they will be more interested in overall trends than price fluctuations. Technical analysis can help trend traders monitor the direction and momentum of their chosen trends and time their trades accordingly. During short-term trends, momentum indicators and moving averages can help trend traders spot sudden breakouts. Equally, they can help traders avoid being caught out by reversals.
Unlike swing traders, trend traders are likely to keep an eye on the news and monitor overall market sentiment. In strong, long-term trends, the strategy can be relatively hands-off, provided stop-losses and take profits are in place.
At the extreme end of the trend trading spectrum is position trading, where positions last across months or years. Traders overlook temporary reversals or fluctuations and instead hold steady, hoping for long-term profits.
For example, traders may seek to cash in on growth assets, such as cryptos or tech stocks, when outlook is bullish. This suits traders who do not have time to pore over the markets regularly. But trailing stop-losses are key to making sure long-awaited profits are not lost in moments of volatility!
Consider trend trading if: you’re not bothered about monitoring the markets every day or you’d like a more laid-back approach to trading.
If technical indicators aren’t your cup of tea, news trading might be the strategy for you!
Putting fundamental analysis center-stage, news trading strategies focus on market reactions to key news events. Dedicated news traders rely heavily on an economic calendar to stay up to date with key reports and announcements. They’ll also take note of economists’ forecasts in order to plan their trades. Further, staying up to date with the news in the long-term will help traders measure market outlook and the relative strengths of different economies or industries.
Nevertheless, technical analysis doesn’t have to be completely disregarded: it can be invaluable for news traders in timing their trade entry and exits. Further, a glance at the charts can help you avoid making emotional decisions based on news events. Sometimes, the media will create a storm where there is nothing. In this context, news traders frequently live by the mantra, “buy the rumour, sell the news”.
Consider news trading if: you’re not so keen on technical trading but like to stay up to date with the markets.
Beyond these trading strategies, there is endless opportunity for variation and personalization. There’s nothing that binds you to trade in a single time frame or scale. Keep an open mind until you find a routine you enjoy.
Nonetheless, consistency and sustainability should be the deciding factors in your choice of trading plan. If you’re changing your trading approach from day to day, it’s impossible to monitor your progress or learn from your mistakes. Equally, don’t force yourself to copy someone else’s strategy if it doesn’t work for you!
How Do I Choose A Trading Strategy?
Everything about trading is personal. Between your choice of broker, your assets, your capital, and your strategy, you can guarantee that your trading journey will be different to anyone else’s. With that in mind, you need to choose a strategy appropriate to your trading resources (time, capital, internet access, and brokerage), and your level of risk tolerance.
Which Strategies Use Technical Analysis?
Technical analysis can be applied to any trading strategy, but it plays a central role in fast, short-term strategies such as scalping, day trading, swing trading, or trend trading. In particular, scalpers will largely disregard fundamental analysis as they focus on tapping trade signals from the charts.
Which Strategies Use Fundamental Analysis?
Like technical analysis, fundamental analysis can be applied to many trading strategies, but it tends to be used when traders take a more macro view of the markets. It may be used by day or swing traders looking for volatility around major economic announcements, or by trend traders looking at long-term market outlook. However, the strategy most focused on fundamental signals is news trading.