Trading Strategies That Work

Read our Advertiser Disclosure.
Contributor, Benzinga
May 24, 2023

Find your trading strategies that work and implement them with the best online brokers.

Unlocking the secrets of successful trading has captivated the minds of countless people seeking financial freedom over the years. For many people, this means coming up with a consistently profitable trading strategy to incorporate into their overall trading plan.

Finding good trading strategies that work remains a major challenge that many retail traders and other market participants still face. Read on for detailed explanations of the key principles and methods of functional trading strategies that can truly help you improve your chances of success when trading in the financial markets. 

Disclosure: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

What is a Trading Strategy?

A trading strategy refers to a systematic plan or approach employed by traders and investors to make decisions regarding buying, selling and managing their financial assets in one or more markets. It outlines a set of rules, techniques and criteria that guide the trader's actions and help them navigate the complexities of the financial markets.

The primary objective of a trading strategy is to generate profits by taking advantage of market inefficiencies, price movements or other predictable patterns. It provides a structured framework to identify potential opportunities, determine trade entry and exit points, manage risk and allocate capital effectively.

Various types of trading strategies exist, including trend following, mean reversion, breakout, swing or momentum and arbitrage. Traders will ideally choose a strategy that aligns with their risk tolerance, available time, market expertise, personality type and individual preferences.

A trading strategy typically includes several components. These may include:

  • Market analysis: Traders often analyze various relevant factors to identify potential trading opportunities. These can include market conditions, economic indicators, company fundamentals, technical indicators and sentiment indicators. A market analysis can be based on fundamental factors like company financials and news or on technical factors like price patterns and computed indicators.
  • Setting trade entry and exit points: A trading strategy defines specific criteria for entering and exiting trades. It may involve identifying key levels of support and resistance, using moving averages or employing other technical indicators to determine optimal entry and exit points.
  • Managing risk and money: Effective risk and money management are key aspects of a sound trading strategy. Such management techniques can involve setting appropriate stop-loss orders to limit potential losses, implementing position-sizing techniques to control the amount of capital allocated to each trade and considering the risk-to-reward ratio of a trade prior to taking it.
  • Timeframe: Traders typically choose a timeframe to operate in based on their trading style and preferences. For example, they can be short-term day traders or scalpers who focus on smaller price movements occurring within a day, medium-term swing traders who watch how the market’s momentum shifts over days or weeks or longer-term position traders who may hold positions for weeks, months or years.
  • Testing and optimization: Traders often backtest their trading strategies using historical data to evaluate their performance over time. They might also test how the strategy performs in a demo account. They may then make adjustments to their strategy and aim to optimize it based on the testing results before using it in a live trading account.
  • Monitoring and adaptation: A trading strategy typically requires ongoing monitoring so that it can adapt to changing market conditions. Traders need to stay aware of relevant news, economic data and market trends so that they can adjust their strategy if necessary.

8 Top Trading Strategies to Increase Your Chances of Profiting

Trading in the markets without a well-thought-out strategy is like taking a trip without a map and can lead to inconsistent and unsatisfying results. To help get you started on your trading journey in the right direction, here are eight top trading strategies that can potentially increase your chances of operating profitably in the financial markets.

1. Day Trading 

Day trading is a strategy where traders buy and sell financial instruments within the same trading day to profit from short-term price movements. Day traders generally aim to capitalize on intraday price fluctuations and close out all positions before the market closes to avoid taking the extra risk of holding a position overnight.

Technical analysis is important to day traders who typically use charts, patterns and indicators to identify trade entry and exit points. Day traders also usually prefer volatile and liquid instruments like stocks, currency pairs and futures.

Risk management is vital to a day trader and generally involves setting stop-loss orders and profit targets. Day traders also need to manage their money well by determining appropriate position sizes given their account size and risk tolerance. 

Day trading requires active monitoring, focus and discipline throughout the trading day. Beginners should practice using demo trading accounts and educate themselves on technical analysis and risk management. Sufficient starting capital is also needed, and traders should take transaction costs such as commissions and fees into account.

Emotional control is also important to avoid impulsive decisions driven by fear or greed. Overall, day trading involves significant risks, and education and regular practice usually contribute to success.

Pros of Day Trading

  • Potential for quick profits
  • Active involvement and excitement
  • Flexibility in terms of work hours and location. 
  • No overnight exposure
  • Increased learning opportunities help day traders to develop skills faster 
  • Potential for leveraging capital that can amplify potential profits, as well as losses
  • Ability to work independently and have control over market activities 

Cons of Day Trading

  • Can be risky since short-term price fluctuations can be unpredictable.  
  • Possible emotional stress from the high-pressure nature of day trading.
  • Involves a significant time commitment. 
  • Has a steep learning curve and requires a solid understanding of technical analysis, risk management and market dynamics. 
  • Requires a substantial amount of starting capital, especially for stock market day traders. 
  • A day trading strategy can show limited opportunities, especially during periods of low market volatility or when there is a lack of clear trends. 
  • Breakdowns in trading technology and internet connectivity can increase a day trader’s risk substantially since they might not be able to monitor their positions. 
  • Day trading is subject to various regulations and may require specific licenses or permissions in certain jurisdictions. 

2. Trend or Position Trading 

Trend or position trading is a popular longer-term strategy used by traders to take advantage of sustained price movements in financial markets. It involves identifying and trading in the direction of established trends with the goal of profiting from the continuation of these trends. 

Trend traders generally focus on identifying trends that consist of prolonged price movements in a particular direction. Bullish trends move upward, while bearish trends move downward, and they can each occur across various timeframes. Traders use technical analysis tools like trend lines, moving averages and indicators to identify and confirm the presence of trends.

Once a trend is identified, traders look for suitable entry points to initiate trades. For example, they can watch for breakouts where the price moves above a resistance level in an uptrend or below a support level in a downtrend. They may also enter the market on pullbacks or retracements within the prevailing trend. 

An exit strategy for a trend-following position can involve looking for signs of a trend reversal or weakening like the price breaking below support or above resistance. Stop-loss orders are typically used to manage risk and limit potential losses. Trailing stop-loss orders can also be used to protect profits as the trend progresses.

Trend traders should determine their risk tolerance and set appropriate stop-loss levels for each of their position trades. Position sizing techniques, such as allocating a percentage of capital to each trade, can help them manage the money in their trading account. 

Trend trading requires patience to wait for high-probability setups and discipline to follow the trading plan consistently. Sticking to their strategy and avoiding impulsive trading decisions can help increase their chances of success.

Trend trading carries certain risks and limitations since trends can be short-lived or subject to sudden reversals. Trend traders can improve their results by managing risk, staying disciplined, educating themselves and adapting to changing market conditions. 

Pros of Trend Trading

  • Lets traders profit from sustained price movements.
  • Trading along with the trend increases the likelihood of making successful trades.
  • Filters out short-term market fluctuations and noise to help clarify decisions.
  • Trends offer the potential for significant profit opportunities when successfully captured.
  • Works on all timeframes so traders can choose the timeframe that best suits their trading style and preferences.
  • Involves fewer trades and less constant trade monitoring, so it tends to suit traders with less available time.
  • Trend traders can manage risk with trailing stop-loss orders to protect profits as the trend progresses.
  • Less reliant on precise market timing compared to other trading strategies.

Cons of Trend Trading

  • False or short-lived trends can lead to unreliable signals and trading losses.
  • Entering trades after a trend has already established itself can result in missing the early part of the move. 
  • Exiting trades after a trend has weakened or reversed can result in giving back some profits.
  • Consolidations and sideways movements can result in costly whipsaws.
  • Losses can result if trend-following positions are not exited promptly when a reversal occurs. 
  • Some people find it mentally challenging to sustain the patience and discipline to stay in a trade for an extended period.
  • Trend traders may struggle to find opportunities and generate profits in ranging markets that lack a clear trend.
  • Relies heavily on accurately identifying and confirming trends, so mistakes in doing so can result in losing money to false signals. 

3. Swing Trading

Swing trading is a popular trading strategy that aims to capture medium-term price swings within the broader trend of a financial instrument. It involves identifying and taking advantage of price movements that occur over a few days to weeks. 

Swing traders look for opportunities to enter trades at the beginning of a price swing, which is a directional movement within a trend. They aim to ride the price momentum as the swing develops and exit the trade when signs of a reversal appear. The goal is to capture both trending moves and counter-trend retracements that occur within an overall market trend. 

Typically using a combination of technical analysis tools and indicators to identify potential swing trading opportunities, a swing trader might peruse price charts to look for reliable candlestick or classic chart patterns that signal reversals. 

They might also use key technical indicators like moving averages, trendlines and momentum oscillators to help them confirm the direction and strength of the trend or counter-trend move so they can take an educated guess about when it will reverse. These tools help them time their entry and exit points for optimal risk-reward ratios.

Risk management using stop-loss levels is essential in swing trading to limit potential losses if a trade goes wrong. Placing stop-loss levels is typically based on key support or resistance levels or technical indicators. Profit targets can be set based on the expected magnitude of the price swing and adjusted over time. 

Swing trading requires discipline, patience and the ability to identify suitable swing trading opportunities. Traders using this strategy must vigilantly monitor trades to adjust positions or exit them if the swing loses momentum and seems likely to reverse direction. 

Swing trading can best suit traders with a moderate risk appetite who prefer a more relaxed approach compared to day trading or scalping since this strategy allows them to participate in the market without constantly monitoring positions. 

Pros of Swing Trading

  • Opportunity to capture medium-term price swings within the broader trend.
  • Potential for larger profit potential compared to shorter-term trading strategies.
  • Reduced time commitment compared to day trading, allowing for more flexibility.
  • Lower dependency on constant market monitoring.
  • Potential to ride significant price momentum within the identified swing.
  • Can capture both trending and counter-trend moves. 
  • Can apply technical analysis tools and momentum indicators for improved trade entries and exits.

Cons of Swing Trading

  • Potential for missed opportunities in shorter-term price movements.
  • Market noise and false signals can adversely impact trade decision-making.
  • Incomplete capture of the entire trend.
  • Drawdowns can occur during periods of consolidation or choppy markets.
  • Potential for emotional stress and having to deal with the psychological challenge of regularly reversing trade directions.
  • Costly mistakes can occur when identifying swing points and trend direction.
  • Market timing challenges can arise in volatile or rapidly changing markets.

4. Scalping

The scalping strategy is a fast-paced and short-term approach to trading that aims to profit from small price movements in a market. It typically involves executing numerous trades within a short period, with a scalper often holding positions for seconds to minutes with the objective of accumulating small gains from each trade.

Scalpers generally focus on highly liquid markets and use technical analysis tools to identify short-lived trading opportunities. They enter and exit trades swiftly, often relying on direct market access (DMA) platforms for rapid order execution. 

Scalpers might monitor tick or point-and-figure charts to find short-term price patterns. They may use other technical analysis tools like indicators to quickly identify trading opportunities as they enter and exit trades swiftly to capture small price movements.

Risk management is very important to a scalping strategy, so scalpers usually place tight stop-loss orders and have small profit targets. Successful scalping requires focus, discipline and the ability to make quick decisions based on real-time market information. 

Scalpers also face the risk of being caught on the wrong side of the market during sudden market reversals or experiencing slippage during volatile trading periods. Transaction costs like dealing spreads and commissions can also impact their profitability because of the high trade frequency scalping requires. 

Scalping is time-consuming and typically quite stressful, so it may not be a suitable strategy for most traders. You should carefully consider your risk tolerance, preferred trading style and available time commitment before adopting this strategy.

Pros of Scalping

  • Potential for frequent trading opportunities.
  • Ability to profit from small price movements.
  • Quick profit realization within short timeframes.
  • No exposure to overnight market risk.
  • Less reliance on long-term trend analysis.
  • Potential for high trading activity and liquidity.
  • Possibility to generate consistent and regular profits.
  • Flexibility in adapting to different market conditions.

Cons of Scalping

  • High trade frequency raises the potential for increased transaction costs.
  • Greater susceptibility to order slippage and trade execution delays.
  • Increased stress and pressure from the need for very quick decision-making.
  • Challenging to maintain consistent profitability with small gains.
  • Potential for whipsaw movements and false trading signals.
  • Need for advanced technology and fast execution platforms.
  • Demands constant market monitoring and attention.
  • Unsuitable for traders with limited time availability or risk tolerance.

5. Arbitrage Trading 

The arbitrage trading strategy involves taking advantage of price discrepancies in different markets or assets to generate profits with minimal risk. It relies on exploiting temporary inefficiencies in pricing that occur from factors such as market imbalances, delays in information dissemination or variations in supply and demand. 

Arbitrage traders typically identify opportunities where the same asset is priced differently in two or more markets. They might simultaneously buy the asset at a lower price in one market and sell it at a higher price in another market, thus capturing the price differential as profit. 

The arbitrage process is typically executed with great speed and efficiency to minimize the risk exposure and ensure that any price discrepancy identified is captured before it narrows. Arbitrage can be performed across various markets, including stocks, bonds, commodities, currencies and derivatives. The strategy can be implemented manually by individual traders or automated through algorithmic trading systems. 

Arbitrage trading strategies generally require access to multiple markets, real-time data and fast execution capabilities to take advantage of fleeting price disparities. Risk in such strategies is reduced by the short holding period and the assumption that the price discrepancy observed will eventually be eliminated and result in a locked-in profit. 

Arbitrage opportunities are usually short-lived and become increasingly scarce as markets become more efficient. The strategy requires advanced analytical skills, technological infrastructure and market expertise, as well as the ability to quickly identify and exploit price discrepancies for profit. Traders using this strategy must also consider transaction costs like dealing spreads, fees and commissions that can eat into their potential profits. 

Pros of Position Trading

  • Potential for low-risk profits by exploiting price discrepancies.
  • Arbitrage opportunities can exist in various markets and asset classes.
  • Possibility to generate returns regardless of market direction.
  • Reliance on quantitative analysis and statistical models rather than market speculation.
  • Can be implemented manually or automated through algorithmic trading systems.
  • Usually involves short holding periods. 
  • Having offsetting positions minimizes exposure to market volatility.
  • Allows traders to benefit from market inefficiencies and imbalances.

Cons of Position Trading

  • Requires advanced technological infrastructure and access to multiple markets.
  • Limited availability of profitable arbitrage opportunities as markets become more efficient.
  • Potential for transaction costs like fees, spreads and commissions to erode profits.
  • Relies on fast execution to capture fleeting price discrepancies.
  • Arbitrageurs compete with professional traders and firms.
  • Typically requires a deep understanding of market dynamics and advanced analytical skills.
  • Possibility of regulatory restrictions or limitations on arbitrage in certain markets.

6. End-of-Day Trading

The end-of-day trading strategy is a trading approach where traders analyze and execute their trades at the close of the trading day, rather than actively monitoring and trading throughout the day. 

Traders using this strategy aim to capture longer-term price movements and trends by analyzing the market's closing price. They typically analyze daily price charts and apply technical analysis tools and indicators to identify potential trade setups. They also might look for significant price levels, chart patterns and trend formations that can provide reliable signals for them to enter or exit trades. By focusing mainly on daily closing prices, they can filter out market noise when making trading decisions.

Once their analysis is done, end-of-day traders will place their trading orders just before the market closes, including their entry, stop-loss and take-profit levels. They usually then let these orders execute automatically either at the close or when the market opens on the following trading day. Risk management techniques like setting appropriate stop-loss levels are vital to managing potential losses in case the market moves against their positions.

This approach allows traders to avoid the need for constant monitoring of the market and provides more flexibility in terms of time commitment. The end-of-day trading strategy is thus popular among traders who have limited time availability or prefer a less intense trading approach. 

The end-of-day strategy does require patience and discipline to wait until the end of the trading day to make trading decisions. Those using this strategy often have a longer-term perspective and aim to capture multi-day or multi-week price movements. 

Pros of End-of-Day Trading

  • Requires less time commitment and allows for a more relaxed trading approach.
  • Removes the need for constant monitoring of the market during trading hours.
  • Focuses on longer-term price movements and trends, potentially capturing larger profit opportunities.
  • Reduces the impact of market noise and short-term fluctuations.
  • Allows for more thorough analysis and decision-making based on daily closing prices.
  • Can be suitable for traders with limited availability or those who prefer a less intense trading style.

Cons of End-of-Day Trading

  • Misses out on potential intraday trading opportunities, short-term market reversals and quick price movements.
  • Relies heavily on accurate analysis and predictions based on daily charts and closing prices.
  • Requires patience to wait for the end of the trading day for trade execution.
  • Increased exposure to overnight market risks and potential news gaps.
  • May result in wider stop-loss levels compared to intraday trading approaches.

7. Trading the News

Trading the news or news trading is a trading approach that focuses on taking advantage of significant market movements and volatility caused by the release of economic news, corporate announcements or other important events. Traders employing this strategy aim to capitalize on the immediate market reaction to news events. 

News traders typically closely monitor economic calendars, news sources, policy statements, geopolitical events and corporate announcements to identify upcoming events that can potentially impact the financial markets. 

They might pay particular attention to high-impact news releases such as GDP reports, interest rate decisions, employment data, earnings reports or geopolitical developments. When an important news event occurs, news traders might quickly analyze the impact of the news on the market and attempt to position themselves accordingly.

News trading can be executed in various ways. Some traders may prefer to enter the market before the news release, aiming to capture the initial price movement. Others may wait for the news to be released and assess the market reaction before entering a trade. 

News traders typically use a combination of fundamental analysis and technical indicators to make better trading decisions. Risk management is also key in news trading, since the extreme market volatility and rapid price movements that can occur when a news release surprises the market could lead to significant gains or losses.

News trading carries inherent risks since a market’s reactions to news events can be unpredictable. Those trading the news should have a deep understanding of the news and its potential impact on the market, as well as the ability to react quickly and make decisions based on rapidly changing information. 

Using proper risk management techniques like entering stop-loss orders and employing suitable position-sizing methods can help mitigate potential losses. News trading also requires reliable and fast access to news sources and lag-free trading platforms to take advantage of time-sensitive opportunities.

Pros of News Trading

  • Potential for significant profit opportunities during volatile market conditions.
  • Ability to capitalize on immediate market reactions to news events.
  • Availability of a wide range of news sources and economic calendars for information.
  • Possibility to generate quick profits with well-timed trades.
  • Offers a variety of trading opportunities across different markets and asset classes.
  • Can provide unique insights into market sentiment and trends.

Cons of News Trading

  • Risk of high volatility and unpredictable market reactions to news events.
  • Rapid price movements can cause increased slippage during news releases.
  • Requires access to fast and reliable news sources and trading platforms.
  • Demands the ability to interpret news quickly and assess its impact on the market accurately.
  • Involves potential exposure to fake or misleading news that can impact trading decisions.
  • Requires quick decision-making and the ability to manage emotions well during rapid market movements.

8. Range Trading

A range trading strategy is an approach to trading that aims to profit from price movements occurring within a well-defined range or consolidation phase in the market. It involves identifying support and resistance levels where the price tends to bounce between and taking advantage of these price boundaries. 

Range traders typically look for periods of market stability characterized by the price moving within a specific range. They then identify key support levels where the price tends to find buying interest and resistance levels where it encounters selling pressure. 

When the price reaches the support level, a range trader may enter a long position with the expectation that the price will bounce back up. Conversely, when the price reaches the resistance level, the trader may enter a short position thinking that a downward reversal is likely.  

Range trading typically employs technical analysis tools such as trendlines, horizontal support and resistance levels and oscillators to identify and validate the trading range. Traders often set their entry and exit points based on these levels, aiming to capture profits while the price oscillates within the range. 

Risk management techniques, including the use of stop-loss orders, are essential to limit potential losses if the price breaks out of the range while a position is open. Range traders may also elect to trade in the direction of confirmed breakouts that do occur since the market is likely to continue to move toward a target set by projecting the width of the range from the breakout point in the direction of the breakout.  

Successful range trading requires patience, discipline and the ability to adapt to changing market conditions. Range trading generally works best in consolidating markets with well-defined ranges and sufficient liquidity. Range traders should watch for false breakouts and whipsaw movements that can lead to losses. 

Pros of Range Trading

  • Provides clear entry and exit points based on well-defined support and resistance levels.
  • Potential for consistent profits in markets with stable price ranges.
  • Offers opportunities to trade in bullish and bearish market conditions.
  • Relatively lower risk compared to trending or volatile markets.
  • Possibility to employ various technical analysis tools to identify and validate the range.
  • Can be suitable for traders who prefer a more patient and systematic approach.

Cons of Range Trading

  • Limited profit potential compared to trending markets.
  • Requires careful monitoring of price levels and market conditions.
  • Potential for false breakouts and whipsaw movements leading to losses.
  • May result in frequent small losses from minor price fluctuations within the range.
  • Reduced trading opportunities during periods of low volatility.
  • Requires effective risk management, including the use of stop-loss orders.

Trading Strategies for Success

One of the most important things to consider when it comes to trading strategies is that there is no one-size-fits-all approach. Every trader should find the strategy that best fits their individual goals, risk tolerance, and trading style. There are many different strategies out there, and some will work better for certain traders than others. It is important to do your research and understand what each strategy is and how it works before attempting to implement it.

Frequently Asked Questions

Q

Which trading strategy is the most profitable?

A

Determining the most profitable trading strategy is challenging since it varies based on market conditions, individual trader skills and risk management methods. With that noted, some trading strategies widely used for their potential profitability include day trading, swing trading, trend or position trading, range trading, arbitrage and news trading.

Q

What is the 3-5-7 rule in trading?

A

The 3-5-7 strategy is a trading strategy where you count the number of time periods over which a rally or decline has occurred on a price chart. When you come to the 3rd, 5th or 7th consecutive time period showing a move in the same direction, you should then look for a reversal in the opposite direction.

Q

What is the 5-3-1 rule in trading?

A

The 5-3-1 rule refers to a forex trading strategy you can use to simplify and structure your currency trading activities. The 5 refers to selecting just five currency pairs to learn about and trade. The 3 refers to three trading strategies you can use with those pairs, and the 1 refers to a single time you trade each day.

Get a Forex Pro on Your Side

FOREX.com, registered with the Commodity Futures Trading Commission (CFTC), lets you trade a wide range of forex markets with low pricing and fast, quality execution on every trade. 

You can also tap into:

  • EUR/USD as low as 0.2 with fixed $5 commissions per 100,000
  • Powerful, purpose-built currency trading platforms
  • Monthly cash rebates of up to $9 per million dollars traded with FOREX.com’s Active Trader Program

Learn more about FOREX.com’s low pricing and how you can get started trading with FOREX.com.

About Jay and Julie Hawk

Jay and Julie Hawk are the married co-founders of TheFXperts, a provider of financial writing services particularly renowned for its coverage of forex-related topics. With over 40 years of collective trading expertise and more than 15 years of collaborative writing experience, the Hawks specialize in crafting insightful financial content on trading strategies, market analysis and online trading for a broad audience. While their prolific writing career includes seven books and contributions to numerous financial websites and newswires, much of their recent work was published at Benzinga.