Trading strategies are essential for stock market success

To be successful in the financial markets, every trader must adopt a trading strategy that fits their investor profile.

Before jumping headlong into trading, it is essential to choose a trading strategy. Short or long term, directional or not, the best strategy will always be the one that best capitalizes on the investor's strengths without being penalized by their shortcomings.

What is a trading strategy ? What are the different strategies used by traders ? How to choose a trading strategy that suits your investor profile ?

Here is a complete overview of the main trading strategies used by active investors to make money on the stock market.

What is a trading strategy ?

By definition, a trading strategy is the art and the way to elaborate and coordinate your trading plans (setups) in order to make your capital grow over time. While investment strategies can be active when they try to "beat the market", or passive when they simply replicate it, trading strategies are always active.  

 The different trading strategies

To make money on the financial markets, the trader can use two main types of strategies. On the one hand, there are directional trading strategies, which consist of betting on the rise or fall of prices, and on the other hand, there are non-directional trading strategies, which consist of betting on other parameters such as volatility or interest rate differentials (carry trade for example).

While most retail traders choose directional trading strategies (spiel), professional traders often opt for non-directional strategies to make more complex bets. There are 4 main trading strategies used by active investors :

• Scalping allows you to make up a few points in a matter of seconds or even minutes. This very short term trading strategy is generally used to trade stock indices. It forces the trader to stay glued to their screen.
• Day trading allows you to open and close your positions during the same trading session. This short-term trading strategy avoids the risk of overnight gaps. It allows the trader to detach from screens when using automated trading solutions.
• Swing Trading allows you to bet on trends that can last from a few days to a few weeks. Although it requires more patience, this medium-term trading strategy allows the trader to intervene in the markets in a discretionary way, in order to bet only on the most obvious opportunities.
• Position trading (buy and hold) consists of holding positions over time, from a few months to a few years. This trading strategy becomes a form of long-term investment, although it does not lead to the creation of a diversified portfolio.

Once you have chosen your strategy, you must stick to it or your short-term losing positions will turn into unwanted long-term positions. Sticking to your original plan is an essential risk management rule. 

Adapting your trading strategy to your investor profile

Your situation, your resources, your constraints and your objectives define your investor profile. Once you have chosen your trading strategy, you will have to adapt it so that it best meets your needs. Ready-made "magic formula" strategies have little chance of bringing you success. To make money in the long term, you must take the time to set up your trading strategy properly.

Among the rules to be set are of course all the risk parameters that will allow you to set limits to your potential losses (on a trade, on a stock market session, on a month, etc.) and to position your stop-loss orders properly. You will also have to take care to set the conditions under which you will take your profits. Will you position a take profit order, or will you rather try to exploit the whole trend with trailing stop-loss orders ?

Finally, it is of course important to choose your financial assets, as well as the type of financial product that you will use to make your financial bets. Please note that external factors such as brokerage fees or taxes must also be taken into account in order to correctly anticipate the behavior of a trading strategy and to estimate the net return that it could provide.

Automating your trading strategy

If the design and management of the trading strategy must remain in the hands of the investor, it is now possible to delegate the entire execution phase to machines. The automation of these often thankless and time-consuming tasks (filling in the order ticket, calculating the stop-loss distance, choosing the position size, etc.) allows the trader to save precious time. These semi-automatic trading algorithms, which are widely used by professional traders, are finally starting to be democratized, and a few minutes of daily work can now be enough to generate additional income.

The icing on the cake is that thanks to the leverage effect, only a fraction of your capital is needed to start opening your first positions. The rest of your funds can then continue to work on other real estate or business projects. Before choosing your automated solution, make sure you choose a reputable platform, developed by professionals and having already proven itself to a community of independent traders.

Choosing the right trading strategy is critical to your success. If you're not sure which option to choose, take the time to learn more about one of the most popular trading strategies: day trading.