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The different trading strategies used by investors.
When it comes to trading in the stock market, different investors utilise different strategies. The use of a particular trading strategy primarily depends on the current market movement and trend formations or reversals. Here’s a brief look at some of the different trading strategies that are commonly used.
A rising stock market is not the only place where investors can make money. By utilising the short-sell trading strategy, they can still earn profits even during a falling stock market. Unlike a typical market scenario where investors buy a stock and then sell it afterward, a short-sell strategy works by first selling the stock at a higher price and then buying the same stock again at a lower price.
The profit that investors get to earn here is the difference between the selling price and the buying price. Short-selling is primarily used by investors for intraday trading and as part of a bigger hedging strategy.
Scalping is another popular intraday trading strategy employed by many investors. This is quite different from the usual buy and hold approach. Here, investors buy a stock and sell it as soon as it becomes profitable. This is a very effective strategy that allows traders and investors to make quick trades.
Scalping allows investors to make small but profitable trades over a period of time consistently. The miniscule profits that they make through these large numbers of small trades then add up to form a significant chunk of revenue. However, keep in mind that this strategy works well only in highly liquid markets with low volatility.
Pivot trading is another exciting strategy that’s used by investors to buy shares online. This approach requires investors to make trades based on the support and resistance levels of the stock. Whenever a stock touches the support level or trades at a level near a support level, they take it as a signal to enter the stock market by buying the stock.
Once they’re done buying the stock, they hold on to it till the stock bounces back up above the support level. They then continue to hold on to the stock till it touches a resistance level or trades at a level near the resistance level. At this point, they sell the stock and exit the market with the accumulated profits in hand. Pivot trading works well in a range-bound market and in a sideways trending market.
Also known as momentum trading, trend trading is used by investors during a trending market to either sell or buy shares online. However, for this strategy to work, the stock market must either be trending upwards or trending downwards. Investors are constantly on the lookout for the usual signs of trend formation and enter into a position only when the trend is confirmed.
For instance, investors would mostly buy a stock when the price is trending upward with a subsequent increase in the volume. Or, they would short-sell a stock when the price is trending downward with a subsequent increase in the volume. Once they’ve taken a position, they would likely hold onto it as long as the market is still trending in their favour. As soon as the stock market shows signs of an emergence of a reversal, these investors would close out their positions for a healthy profit.
Reversal trading is widely considered to be one of the riskiest trading strategies around. However, if executed right, it can turn out to be one of the most profitable strategies as well. Reversal trading requires the investor to go against the trend, which is why it is also known as counter-trend trading. Here, investors closely examine the candlestick patterns generated by a stock and are constantly on the lookout for reversal patterns and signs.
Upon spotting a trend reversal and confirming it, investors then enter into a trade and hold onto the position till the next reversal point. For instance, investors buy shares online as soon as a bullish trend reversal is spotted and confirmed on the charts and hold onto their position till the next bearish trend reversal happens.
Breakout trading is a versatile strategy that can be used for both intraday trading as well as a long-term trading strategy. Here, the investor waits till the resistance level of a stock is broken with a corresponding increase in the volume to enter the market.
Once the resistance level is convincingly broken, the investor then enters into a long position. Alternatively, an investor can also enter the market when the support level of a stock stands broken, with a corresponding increase in the volume. Under such a situation, the investor could enter with a short position.
The strategies mentioned above are some of the most widely used approaches by investors in markets all around the world. However, this is by no means an exhaustive list. There are plenty of other major and minor intraday trading and long-term trading strategies around. That said, when utilising a trading strategy, whatever it may be, always ensure to limit your losses by setting an adequate stop-loss trigger. This way, you can protect yourself from adverse market movements that are contrary to your position.