A Quick Guide To Popular Trading Strategies In 2023

OctaFX experts take a deep dive into the realm of trading strategies to form a guide for traders in 2023. 

Trading in the financial markets can sometimes feel like navigating a wide and ever-changing sea. Traders are, therefore, looking for reliable means of taming financial forces and profiting from them. For that, they need strategies that provide a structured framework for entering and exiting trading orders, managing risks and achieving specific financial goals. Below, you will find the most popular trading approaches traders use in Singapore and worldwide.

What Is A Trading Strategy?

A trading strategy or system is a set of principles that allows traders to identify entry and exit points for their orders, employ risk management techniques and achieve positive trading results.

The key components of any trading strategy include:

• Trading instrument: Carefully selecting the trading instrument you will trade in is important as various instruments have different spread values. Depending on the strategy you choose, the spreads will have more or less impact on your potential profits.
• Timeframe: Timeframes determine the duration for which you hold a position. For instance, the most common timeframes for day trading include 1, 5, 15, 30 and 60-minute charts.
• Entry and exit points: Establishing clear criteria for entering and exiting trades is important for executing trades at favourable prices. This can be done using technical indicators, chart patterns or fundamental analysis.
• Risk management: Implementing risk management techniques will help protect your capital and minimize potential losses. This involves determining the appropriate position size, setting Stop Loss orders and managing risk-reward ratios.
• Position size: The size of your trading orders depends on the strategy you use. However, a good rule of thumb here is not to spend more than 1% of your capital per order while keeping your loss-per-trade at a maximum of 25% and to quit it once it gets there.
• Backtesting: Backtesting your trading strategy using historical data allows you to assess its effectiveness before implementing it in real-time trading.
• Necessary adjustments: Regularly evaluating and adjusting your trading strategy based on its performance is necessary for its continuous improvement.
• Emotional discipline: Emotions such as greed, fear and various biases can significantly impact trading decisions. Developing emotional control and adhering to the strategy's rules – even during periods of volatility or uncertainty – is crucial for long-term success.

A common approach to creating a trading strategy usually involves the following steps:

1. Determining the trend.
2. Identifying the key support and resistance levels.
3. Calculating the average true range (ATR) to measure volatility and identify the order objectives.
4. Identifying the entry point and the Stop Loss level.

Popular Trading Strategies

Day Trading

Day trading involves buying and selling financial assets within the same trading day. The goal is to profit from short-term price fluctuations. To succeed in day trading, you should concentrate on liquid assets, employ technical indicators and implement risk management techniques.

Key steps to employ this strategy:

1. Focus on highly liquid instruments to ensure fast order execution.
2. Use technical analysis tools to identify entry and exit points.
3. Maintain strict risk management and set Stop Loss orders to limit losses.

Price Action Trading

Price action trading revolves around analysing historical price movements to predict future price movements. Price action strategies involve studying candlestick patterns, support and resistance levels and trendlines. They usually do not rely on indicators, they use raw price data instead.

Price action patterns, which are formed by the open, high, low, and close prices of a specific time period, can provide insights into potential trend reversals or continuations. Common price action patterns include triangles, flags, head and shoulders, pin bars and double tops/bottoms.

Key steps to employ this strategy:

1. Study candlestick patterns, support and resistance levels and trendlines.
2. Practice patience and wait for clear signals.

Swing Trading

Swing trading involves holding positions for several days or weeks to capitalize on medium-term price swings within a broader trend. Swing traders identify trends through technical analysis, set profit targets and Stop Loss levels and adapt their strategies as market conditions evolve.

Key steps to employ this strategy:

1. Identify trends and use technical analysis for entry and exit points.
2. Set predefined profit targets and Stop Loss levels.
3. Be aware of potential major overnight price fluctuations.
4. Adapt to changing market conditions and adjust your strategy accordingly.

Scalping

Scalping is a trading style where traders use various short-term strategies to profit from small price movements within seconds or minutes. Scalpers use short timeframes and execute orders quickly. It's crucial to focus on instruments with low spreads, employ technical indicators for short-term analysis and maintain strict discipline.

Key steps to employ this strategy:

1. Use short timeframes and quick order execution platforms.
2. Focus on low spreads and fees to minimise costs.
3. Employ technical indicators like moving averages or RSI for short-term analysis.
4. Maintain strict discipline and risk management.

Trend Trading

Trend trading involves identifying and following established market trends, whether they are bullish or bearish. This strategy requires using the technical indicators to confirm trends, entering trades in the direction of the trend, and holding positions for extended periods – often weeks to months.

Key steps to employ this strategy:

1. Use technical indicators like Moving Averages and MACD or price action patterns to confirm trends.
2. Enter trades in the direction of the prevailing trend.
3. Hold positions for an extended period – weeks to months.

Position Trading

Position trading is a long-term strategy where traders hold positions for months or even years. This approach requires in-depth fundamental analysis considering such factors as interest rates and geopolitical events and setting wide Stop Loss levels to withstand market volatility.

Key steps to employ this strategy:

1. Perform in-depth fundamental analysis for assets.
2. Consider factors like interest rates, geopolitical events, and economic cycles.
3. Set wide Stop Loss levels to withstand market volatility.
4. Monitor and adjust your positions based on changing fundamental factors.

Range Trading

Range trading involves identifying price ranges or channels within which an instrument's price fluctuates. Traders buy at support and sell at resistance until the trading range breaks or wait for the price to rebound from one of the levels. They often use oscillators like the relative strength index (RSI), stochastic oscillator or commodity channel index (CCI) to identify favourable entry and exit points by confirming overbought and oversold market conditions.

Key steps to employ this strategy:

1. Use technical analysis to spot support and resistance levels.
2. Buy at support and sell at resistance until the range breaks. Alternatively, wait for the price to rebound from one of the levels.
3. Employ oscillators to identify overbought and oversold conditions.
4. Be cautious of false breakouts and use Stop Loss orders.

Breakout Trading

Breakout trading aims to profit from significant price movements when an asset breaks out of a well-defined range or consolidation phase. This strategy requires identifying key support and resistance levels, waiting for confirmed breakouts with high volume and momentum and implementing strict risk management. A breakout from the resistance level means the price is likely to go higher, while a breach of the support level indicates that the price is likely to go down further. 

Key steps to employ this strategy:

1. Identify key support and resistance levels.
2. Wait for a confirmed breakout with high volume and momentum, and open an order.
3. Set Stop Loss orders to manage risk.

Trading strategies are essential tools for traders to navigate the complex and dynamic world of financial markets. To succeed in trading, it's crucial to select a strategy that aligns with your risk tolerance, preferred timeframes, and trading style. Additionally, continuous learning, risk management, and discipline are vital aspects of any strategy. However, no strategy—even the most well-thought-out— guarantees success, and it's essential to adapt and evolve as market conditions change.

About OctaFX

OctaFX is an international broker that has been providing online trading services worldwide since 2011. It offers commission-free access to financial markets and various services already utilised by clients from 180 countries with more than 42 million trading accounts. Free educational webinars, articles and analytical tools they provide help clients reach their investment goals.

The company is involved in a network of charitable and humanitarian initiatives, including the improvement of educational infrastructure and short-notice relief projects supporting local communities.

OctaFX has also won more than 60 awards since its foundation, including the ‘Best Online Broker Global 2022’ award from World Business Outlook and the ‘Best Global Broker Asia 2022’ award from International Business Magazine. 

Featured photo courtesy of OctaFX.

This post was authored by an external contributor and does not represent Benzinga's opinions and has not been edited for content. This contains sponsored content and is for informational purposes only and not intended to be investing advice.