Trading Strategies for beginners
Every trading strategy out there has certain elements that need to be kept in mind. Trading is never random in nature and should not be approached without a plan and, in order to have a plan, traders need to keep the following elements in mind:
This is about how much you are willing to risk per trade. The usual percentage is 1-3% but some traders may choose to risk more for the possibility of making bigger returns. It comes down to your risk tolerance and character as a trader. Ideally, you should not risk too much per trade in order to maintain a fighting chance if ever faced with a bad streak of losses.
Timeframe and time management
There are two parts to this. The first one is deciding on a timeframe that suits your trading personality and strategy. The other part is deciding how much time you can dedicate to this. Regardless of how little time you may need to trade your strategy, you still need to make sure you dedicate enough time to plan, execute and study the outcome of your trades as well as accommodate for future adjustments that could improve your profitability.
Start with a small investment
It’s important to begin trading on a demo account so that you can experience real market conditions without risking any real money. Once you feel comfortable enough, you can start trading with real money yet it’s imperative that you start small and with money you can afford to lose. The markets can be unpredictable and losses can happen. In such rare but possible scenarios, losing this money should not affect your mental or financial well-being.
Aside from educating yourself on a daily basis, it’s important to stay updated with the latest economic events and market news as this could affect your trading plan and expectations. There’s a wealth of information available online including CFI’s educational section which features short videos, articles, advanced technical concepts, a glossary of terms and market news. Furthermore, you can get access to daily market reports, free webinars and third party advanced analysis.
Traders can easily get carried away when their emotions come into play. Fear, greed and other negative emotions could affect even the most skilled traders. Let logic, common sense and your trading plan dictate how your trading day progresses instead of emotions. This could mean the difference between a successful trader and someone struggling to be consistent.
Important strategy components to keep in mind
All traders will prefer liquid instruments but to some, it may be an essential part of their strategy. Those traders are usually short term ones, looking to get in and out of the market quickly and without having to deal with potential slippage or a change of pricing.
Volatility helps define the range of a specific market. The more volatile an instrument is; the more potential gains or losses you will experience. Also, volatility can be useful for those looking to trade an instrument that heavily moves without worrying too much about the direction. One famously volatile market is the cryptocurrency market, a recently introduced set of digital currencies that has taken the world by storm and is creating plenty of short and long term trading opportunities.
It’s always important to keep an eye on total volume (Figure 1) as well as individual volume over a period of time to better understand the level of participation. Liquidity may be high, showing strong participation but volume may be low while a higher volume does not necessarily mean participation as it could be sporadic.
Day Trading strategies
A breakout strategy is very straightforward and simple to apply. It entails a trader entering a long position after an instrument breaks an important resistance area. The opposite is true with traders looking to sell after a trading product breaks below an important support level.
After such a breakout (Figure 2) happens, volatility tends to increase in the direction of the breakout. One thing to keep in mind is that the more support and resistance areas hold, the stronger the breakout is likely to be.
Some traders may choose to enter as soon as an instrument breaks a previous important level while other may need a correction so that they can potentially obtain better prices. It comes down to preference and risk tolerance.
Targets will usually focus on previous resistance or support areas or when traders believe that volatility is dying down and the move lost its steam.
Scalping is a form of trading that looks to capitalize on fast and minor price movements using big positions. As soon as a trade is in profit, it’s closed. A high probability system is needed to even out the not so attractive risk to reward ratio. If you’re looking to scalp in the market, you need a highly liquid trading product that’s also volatile and fast moving.
Another straightforward strategy, momentum trading focuses on joining a strong trending instrument in the direction of the momentum and exiting as soon as price action begins to slow down. This is relatively present on a daily basis as there is always a currency pair, stock, commodity, bond and other asset classes with specific instruments that are trending with strong momentum.
A more dangerous but potentially highly rewarding way of trading, reversals occur all the time and could signal the beginning of a new trend. Spotting a reversal is no easy endeavor but with the use of technical and fundamental information, traders can have more success entering when a new trend is starting.
Determine your risk
A successful trading strategy includes very defined risk parameters. No matter how correct someone may be when trading the markets, unexpected news or sudden geopolitical tension could change the direction of entire markets in a heartbeat, leaving you stranded in the market. After figuring out the current market trend and having defined your timeframe and product of choice, it’s important to position yourself accordingly.
If you believe you need bigger stop-losses because the instrument you are trading can be volatile, even when you are approaching the market from a long term perspective, then it’s best not to overleverage yourself and potentially using smaller positions as opposed to having more flexibility for instruments that do not whipsaw too much in the short term.
For those who are trading short-term strategies, bigger positions may be acceptable as long as stop losses are in place and the risks are defined.
When trading with leverage, it’s important to keep in mind that profits and losses are magnified, depending on your exposure. Limiting your losses means getting out when your strategy tells you to do so regardless of running profits or losses. A stop loss order helps protect your position from adverse market conditions and get you out of the market when the time is right without getting attached to the trade. Remember that the market is prone to sudden and unexpected price movements that could be based on a sudden geopolitical or economic event.
As we have previously explored the criteria needed to create your own trading system, position sizing is an important one and falls in line with your capital, how much you are willing to risk and your stop loss and target expectations per trade.
Always remember a common rule of thumb and that is to never risk more than 1-3% of your account per trade. Even after a series of losses, you would still retain most of your capital which will give you another chance at making profits especially if your risk to reward and strategy are skewed towards bigger returns and minor losses.