Trading techniques can make the difference between a winning and a loosing position, even with the same entry price. They are key to surviving as a trader, especially the during the first year of trading. We all heard about planning the trade and trading the plan and our article today will cover trading techniques we believe are important to succeed.
Define your time horizon
In other words, how long are you ready to hold and wait for your price target? Trading horizons range from seconds to years:
- Scalpers initiate multiple trades daily and seek to benefit from bid/ask spreads.
- Day traders hold their positions for minutes to hours but do not hold positions overnight. They seek to ride momentum or news expected to cause sharp and quick price movements.
- Swing traders can hold their positions for more than a day and it could take weeks before their price targets are met. Swing trading gives traders more flexibility as both fundamental and technical traders can succeed using this technique.
- Finally, we have investors using the Buy-and-hold strategy. They have longer horizons and are ready to hold through price swings.
Diversify Your Portfolio
It’s important, to properly maximize profit, that you diversify your portfolio where possible. This essentially means that you aren’t all in on any specific stock. You pick a balanced, broad spectrum of stocks. If any fail, you’ll be hedged. It goes beyond that, though. For example, when the stock market dips substantially all of the stocks tend to go with it. Whereas if you were partially invested in private company stock, a portion of your investment portfolio will survive the drop. The trick with private company stock is to make sure you do the research on the company before investing. Or, you can trust a reseller or investment firm to do that for you. The point is that with a diversified portfolio, you’ve got less chance of your overall investments failing, and more chance of catching a good vertical.
Managing risk and profits
A clear definition of the time horizon is the first step to proper risk management.
Day traders and scalpers have a very limited risk tolerance therefore should use tight stop losses. This will allow them to protect their capital and move on to the next winning trade. Cutting losses early is one of the toughest but very important lessons day traders need to master.
Swing traders have longer timeframes, their stop losses are not usually as tight as for day traders. For momentum trades, it is a good practice to set a first price target and take out profits as soon as the target is met. Trailing stops could also be used to let the winning positions ride and trailing profit.
Long term investors can use a Dollar-cost averaging strategy to scale their entries (or exits) by adding shares when the equity’s price drops. If executed properly, this technique allows investors to benefit from volatility.
Portfolio management
Before initiating a position, traders and investors need to set their entry price, profit target and exit target. Picking the right stocks or currency pairs depends on risk tolerance, horizon and the trader’s background: Some prefer to use fundamental data others rely on technical charts and indicators.
Traders need to consider the liquidity of the position and how tight the spreads are (the difference between the bid and ask price). A low slippage (the difference between the expected price of a trade and the execution price) is also an important factor. Using limit orders versus market is an effective way to avoid unpleasant surprises.
Volatility and volume can vary depending on the time of the trading day. For less experienced traders, avoiding market open can be a safer approach.
Using positive or negative correlations is a powerful technique for building a portfolio or finding winning trade setups. Positive correlation trading strategy allows traders to trade forex at a lower risk. It consists of spotting 2 currency pairs with a strong positive correlation, identifying a divergence where the price of one of the pairs dips to initiate an entry knowing that the positive correlation will resume.
Negative correlations between asset classes or currency pairs are used to manage systematic risk. This is an important part of building a portfolio and hedging especially during periods of high volatility.
Hedging a position initiated in the forex or the stock market can be done by buying options calls or puts opposite to the initiated positions. Traders can use FX options trading to buy put options on the currency pair they are longing and profit from a temporary decline in price while holding their initial buy.
