Different Types Of Trading Strategies most popular today? | Motilal Oswal

Types Of Trading Strategies most popular today

The stock market today is an incredibly volatile and unstable place with many ways to lose one’s money. Online trading provides investors with a lot of freedom to make their own decisions regarding the kind of investments they want to make, the amount of money they want to invest, the level of diversity they want to have in their portfolio etc. 

This freedom is a great thing as it allows for investor speculation and free movement in the stock market. But this also means that investors are always at a risk of losses- potentially enough to severely impact their financial stability. This risk-reward tradeoff is a core principle of the share market in India. 

So, what must an investor do to be in the best possible situation? Since the stock market has plenty of profitable and loss-making investments and allows investors to freely invest their money, it becomes imperative for the investors to develop a sound trading strategy to ensure a streamlined investment approach and put themselves in the best possible position. 

Now, many of you must be wondering, what is a trading strategy? Why are trading strategies used? What are some common trading strategies used while online trading? Let us answer all these questions and shed some light on the nuances of trading strategies in today’s investment paradigm. 

Trading strategies and their relevance for all those wondering what a trading strategy is, it is simply a process for purchasing and selling assets in a systematic manner. When making investment choices, a trading strategy relies on a set of pre-specified criteria and rules to take form. 

Investing styles, market capitalisation, analysis of technical and fundamental factors pertaining to the company, an appropriate degree of diversification in one’s portfolio, timeframe of investment or investment horizon, leverage, tolerable level of risk, the kind of implications the investment has on tax paid, and other factors may all be taken into account in an investor’s trading strategy, which can be simple or complex. 

The most important thing is that any strategy developed for the purpose of online trading, once adopted should be strictly followed. Moreover, it should be established utilising data that is objective in nature and research to back it up. A trading strategy should also be frequently reviewed and modified when market circumstances or personal objectives change.

To minimise behavioural finance biases and guarantee consistent outcomes, trading methods are used. For instance, traders who abide by the rules dictating when to close a deal are less likely to fall victim to the disposition effect, which leads investors to hang onto declining securities and sell rising ones. 

To gauge consistency, trading techniques can be put under pressure in a variety of market environments. Sound investment strategies are hard to design, though, so there is a possibility of being over-reliant on a plan while online trading. 

4 common active trading strategies 

Now that we have looked at what trading strategies are, what factors they take into account and how they are relevant, let us also look at some common trading strategies used in the share market today- 

1. Day trading- Open/close deals throughout the single trade day is known as day trading. The majority of the time, day traders hunt for trading opportunities in the early morning or during the trading day, closing all open positions before the conclusion of the trading day.

Day traders that adhere to this extremely active, short-term trading strategy try to capitalise on intraday movements and keep their deals open for several hours in order to do so. Despite often opening fewer deals than scalpers, day traders are nevertheless quite busy. Day traders may open a dozen transactions every day, based on a particular trade day and the number of tradeable possibilities. 

A day trader, however, will simply have to wait for the following trading day when there are no chances. Day trading calls for both disciplines to seek the optimal trade setting and quick hands to place a transaction as rapidly as it presents itself. Day trading is a good trading method for more seasoned traders since trading choices are made very quickly.

2. Scalping- Another common trading strategy used while online trading is called the scalping strategy. Scalping is an extremely active, quick-paced trading strategy. Depending on the trading method employed by the scalper, it entails opening and closing deals in a couple of moments. 

Scalpers attempt to profit from extremely brief price changes, which frequently take the shape of breakouts. A concentration of stop-loss and outstanding orders tends to push the market in the breakout's direction when the price breaches a significant technical level. As a result, large momentum candlesticks are frequently visible immediately following a price breakout of a significant support or resistance line.

3. Swing trading- It is a lengthier kind of trading that entails leaving positions open over many days or even weeks. Swing traders seek to profit on market "swings," or the significant directional shifts shown on longer-term charts. They must achieve this by using a bigger stop-loss to take into account the price fluctuations, with returns often expressed in massive margins. 

Swing traders only need to passively manage their trading activities because they maintain their positions for comparatively extended periods of time. Because of this, swing trading is a better trading strategy for those who work regular jobs and don't have the time to monitor the market constantly.

4. Position trading- Lastly, another popular online trading strategy is position trading. Position trading, in which deals are held open for months at a time, is the longest-term trading strategy. While investors often invest for the long term and use a buy-and-hold strategy.

Market fundamentals, particularly long-term fundamentals like credit and market cycles, trade balance and terms of trade etc all have a significant influence on position trading. To resist unfavourable price changes over the short- and medium-term, position traders should also have large stop-losses.

Conclusion 

So these are the most common active trading strategies used in the stock market today. Each of them has its own merits and demerits and is suitable for different types of investors having a different set of goals, time commitment, risk tolerance etc and are all viable in the current trading paradigm. 

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