To begin with, simple doesn’t always mean bad. Fairly often, the best trading strategies are very simple. Most traders struggle not because they don’t have a working strategy but because emotions such as greed, desire to revenge-trade, and fear to follow their strategies get in the way.
This article discusses the three best strategies that even beginner traders can follow. It’s best to backtest or demo-test these strategies before using them live. Testing has a double purpose. Firstly, every tradable instrument is unique, and strategies work differently for each. Secondly, testing strategies can increase traders’ confidence in the trading system, and consequently, fear disappears.
Trading Strategy #1: Trend trading
The main idea behind trend trading is that you don’t have to be a genius to make money. It’s not important to guess reversals and picks when trading. Trend traders simply identify trends, have tools to measure their strength, find entries and observe price developments to find exits.
Many beginners and professionals trade trends. However, it should be mentioned that some professionals also trade against trends. Trading against trends is definitely a possibility and can be profitable for some. However, it requires a high degree of experience and complex trading strategies.
Identifying trends
A general direction of the price of an asset is called a trend. In technical analysis, trends are identified using simple trendlines. Trendlines connect a series of price lows and price highs. Not only that, there are several strategies to identify trends. For example, the Ichimoku Kinko Hyo helps identify support/resistance levels in financial markets. Whichever you go with, there are only two ways the market can go:
There are two types of trends:
- If the price makes higher swing highs and higher swing lows, we have an uptrend, also known as a bullish market.
- When price makes lower swing lows and lower swing highs, we have a downtrend or a bearish market.
Measuring the strength of a trend
When a trader finds a good trend, it can very well be at an exhaustion phase, and the price may reverse. And therefore, it is essential to measure how strong the trend is to see if joining the movement is even worth it. There are a couple of methods traders can measure strength. The easiest way is to use the trendlines again. As we have already mentioned, simple trendlines help traders identify trends. In addition, they can help make predictions on potential price direction. For example, if a price moves between two trendlines and the market is bullish when the price is close to the lower trendline, there’s a potential for an uptrend.
One more method is using volume indicators. It should be mentioned that you can simultaneously use both trendlines and volume indicators to measure the strength of a trend. You want trade volume to be high when you are in a trend. High volume is an indication of interest. More traders are joining the trend, which can help prices go towards a trend directly. Conversely, if the volume is low, it may indicate that the price will reverse.
Finding entry
The easiest way to find entries is to use simple trendlines. For an uptrend market, when the price reaches the lower trendline but fails to break it, you have an entry point. The trendline can also help you place a Stop Loss order, usually set below the entry point. The same approach world for downtrend markets in reverse. For instance, in a bear market, traders short when the price gets closer and fail to break the upper trendline.
Finding exit
There are two main approaches when it comes to exiting a trade. Some people have strong rules on risk-reward ratios. For example, if the risk is one and the reward potential is three, they take profit accordingly. However, this approach is not the best, as it limits traders from taking maximum benefits.
Professional traders try to ride trends and let price action tell when to exit. In this regard, volume indicators are very useful. As already mentioned, when volume remains high in a trend, it means that the trend may continue and vice versa. One strategy to exit a profitable trade is using manual or automatic trailing stops.
Things to take into account when trend trading
The best trend is not the one that makes the biggest jumps but the one that goes towards one direction steadily, step-by-step. In a steady trending market entering is easier, the Stop Loss target is more clear, and trailing stops work the best.
Keep in mind that trend trading strategies are purely technical. And as a result, market announcements can change the direction of a trend. Typically, traders avoid placing orders before major news announcements, and that can cause trends to slow down. In addition, short time market reactions to the news are mostly unpredictable and can reverse already established trends. It’s best to keep an eye on the economic calendar if you are a purely technical trader.
Trading Strategy #2: Range Trading Strategy
An asset price can be in an uptrend, downtrend, or in a range. We’ve already discussed how to trade trends. Now it is time to discover a simple range trading strategy.
Identifying range
Simple trendlines can also be used to identify ranges similar to finding trends. Trendlines connect price swing highs to one and price swing lows to one another. When the price moves between Horizontal trendlines, we have a price range.
Finding entry
When the price moves between horizontal trend lines and gets closer to the lower trendline, and fails to break the resistance, we have an entry for a long position and vice versa. Traders can add more complexity to this strategy by using oscillator indicators. Oscillators show overbought and oversold conditions. When the oscillating indicator’s value exceeds 70-80% (depending on the preferences), we have an overbought condition, and the price will likely reverse. And when the price is below the 20-30% indicator value, the price is expected to rise. Remember that oscillating indicators only work in ranging markets and produce false signals in trends. For higher precision, traders can range trade when the oscillator gives them a signal, and at the same time, the price gets close to the trendline.
Exiting a trade
Usually, when trading a ranging market using simple trendlines, Stop Loss orders are placed right behind trendlines. And Take Profit orders are placed in front of the trendlines. For instance, let’s say the price moves in a range, take profit would be placed right before price starts testing the trendline to ensure the order will be filled.
Important things to know about range trading
Similarly to trend trading, range trading is technical. And it’s always best to keep an eye on the economic calendar as news announcements can have unpredictable consequences on asset valuation.
The Forex market is a more ranging market than the Stock market as real economies back currencies. Whereas it’s easier for companies to go out of business, which will result in a price drop to zero. You will not see this when it comes to trading currency pairs. In addition, share prices can increase with no limit, thanks to inflation and business globalization.
Trading Strategy #3: Swing Trading
Swing trade refers to keeping a position active longer than a day up to a few weeks. Swing trading is great for beginners as they have more time to plan their trades and trade their plan. What’s more, as opposed to day trading, traders do not need to remain glued to their screens. Swing trading is best for busy individuals as it frees up a lot of time.
One simplest and very effective way to swing trade is to use an Exponential Moving Average EMA indicator. The EMA is derived from Simple Moving Average SMA. The main difference between the two is that EMA puts more weight on recent price movements in its formula, producing entry and exit signals faster. EMA is a trend trading indicator. The EMA consists of two moving averages. Typically, one EMA is of a 50-day period, and the other is a 200-day EMA.
When the 50-day EMA crosses the 200-Day EMA below, it is a sign that an uptrend is ending, and that reversal will likely happen. An uptrend crossover, also known as Golden Cross, signals that an uptrend is about to start.
Indicators work less effectively when using them in shorter than a day timeframes. The reason is simple: market noise. Many swing traders use the EMA strategy as it’s easy to use and more precise for higher time frames.
Summary
To sum everything up, simple and boring doesn’t mean bad. Traders need to master their emotions, learn about different strategies and test them before going live to understand what works for each asset and increase confidence. For trading trends and ranges, traders use simple trendlines. In trend trading, volume indicators often play a key role in take-profit placement. For trading ranges, oscillators are used in conjunction with simple horizontal trendlines. Another simple trading strategy to follow is the Swing trading strategy using Exponential Moving Average EMA. In addition to the three strategies, you can find more strategies that can result in profits online.
