In order to become a successful trader, you will need to carefully balance the level of risk you’re assuming with the amount of return you hope to achieve. Naturally, anyone who is hoping to earn greater (on average) returns on their trades will need to be willing to assume greater risks.
The risk-reward ratio that is right for you will depend on your personal preferences, your general trading objectives, and the amount of time you can dedicate to trading. There are seemingly countless different trading strategies available to choose from—if you are unsure what your current level of risk tolerance is, it may be helpful to experiment and test out multiple different combinations.
The best trading strategies are the ones that will enable you to stay ahead of the market. While it is impossible to know with certainty which specific price movements are about to occur, there are still many techniques you can use to make the market more predictable.
In this article, we will discuss six creative trading strategies that could potentially improve your ROI. We will also discuss some of the technical indicators that can enhance these strategies and how these strategies can be effectively employed.
1. Momentum Trading Strategies
Momentum trading strategies use the simple—yet consistent—assumption that if a price trend is currently strong, then that price trend will likely continue into the foreseeable future. Traders believe that a decline in momentum will typically occur before a total price reversal, making it possible to hold their positions for longer than would otherwise be deemed appropriate.
Momentum trading strategies can draw from a wide range of technical indicators. Using candlestick charts and oscillating indicators can make it easier to determine whether a given trend is picking up or losing strength. Looking at volume indicators, particularly the money flow can also enhance a momentum trading strategy. This is an excellent approach to the market that carefully blends risk and reward.
2. Harmonic Pattern Trading
The purpose of Harmonic Pattern Trading is to identify specific price turning points using geometry (specifically, Fibonacci sequences). By paying close attention to the geometric relationships that exist between the four most recent price reversals, harmonic pattern traders are able to predict where the next turning point (the fifth) is most likely to occur.
After plotting out the recent turning points and drawing a quadrilateral between them, there are a variety of patterns that—due to the universal use of Fibonacci numbers—are likely to emerge. These patterns include the Gartley Pattern, Butterfly Pattern, Crab Pattern, Shark Pattern, Cypher Pattern, and various others. Each of these patterns will tell you something different about where the market is moving. If you hope to succeed as a harmonic pattern trader, you will need to be patient and avoid “forcing” patterns where they don’t actually exist. The Elliott Wave is a technical indicator that is particularly complementary to Harmonic Pattern Trading.
3. Fundamental Analysis
Fundamental Analysis is a bit different from the technical trading strategies mentioned in this article. With fundamental trading techniques, traders are less concerned about the math behind the markets and more concerned about whether the value of a security has materially—in other words, fundamentally—changed. Because of this, fundamental analysts will need to pay close attention to developing stories in the news.
There are quite a few stories that can have a direct impact on security’s perceived value. When a scandal breaks, a company decides to restructure, financial reports are released, or new laws are passed, the effects of these stories will begin to immediately ripple throughout the marketplace. Fundamental analysts know that markets are generally a little slow to react, meaning that if they are able to pay close attention to the news, they can potentially beat the market. These analysts also know that markets tend to overreact—this creates additional trading opportunities as prices revert to the norm.
4. Position Trading Strategies
Most trading strategies—including several of the strategies mentioned in this article—are designed for day traders and other individuals assuming very short positions. However, position trading strategies are created for individuals who hope to identify trends that are measurably more significant. The typical timeframe for a position trading strategy can range from a few weeks to more than a year.
Position traders will need to pay attention to both fundamental news stories as well as technical indicators. Moving Average Indicators, such as the MACD and various others, can easily be adjusted to allow traders to view how trends have played out over the course of six months. Position traders also need to closely monitor macroeconomic conditions that extend beyond single security. When the entire economy is about to experience a bullish rally, for example, these traders may be willing to take greater risks.
5. Swing Trading Strategies
Swing trading is a mid-term strategy that revolves around the somewhat unique mantra of “buying high, selling even higher.” In other words, swing traders will attempt to identify once a price trend has broken out of its typical oscillating “noise” and is actually swinging upwards in pursuit of a genuine price increase.
The Ichimoku Cloud is an excellent indicator for swing trading strategies, due to its comprehensive nature and multiple different trigger points. Additionally, swing traders can benefit from paying attention to Bollinger Bands. These bands make it easier to identify the existence (or non-existence) of a particular price channel. Once prices have broken out of these channels, a mid-term price swing is likely to occur.
6. Pure Diversification
Diversification is a principle that seemingly all traders know is important, yet, it is a principle few active traders are willing to adjust their portfolios to pursue. However, diversification is something that can be achieved in many different ways.
Diversification is the surest way for any trader to reduce the overall risk of their portfolio. Not only should you be diversifying the markets you are trading in, you should also diversify the selected securities you trade within these markets. Trading via index funds an excellent way to get started. Furthermore, using multiple different trading strategies—as well as multiple different indicators—can help you identify a wider range of profitable opportunities. These strategies and indicators are by no means mutually exclusive. Paying attention to the news, for example, does not mean you need to ignore the Relative Strength Index.
There are seemingly countless different ways you can enter into and exit out of the market. These trading strategies represent just a few of the available options. By paying close attention to the details and making careful choices with each of your positions, there will be plenty of wealth available to be made.