Trading strategies are a set of rules for trading various instruments in the market. These strategies are devised based on many factors; like, type of trader; type of instruments being traded; market condition, goals of trader; budget ; risk bearing and holding capacity; time frame. return, correlation with the markets, and so on.

When a trader or a professional devise a trading strategy. they generally run a back test several times in various market conditions that it is devised for; and based on the outcome of application, it is launched in the market or executed on a larger scale. If per chance while back testing, some lacunas are found, then they are fixed the fine-tuned before the same is launched amongst traders in the market. However, back testing is hardly a guarantee that the strategies will work in future in similar market conditions, because market dynamics change all the time.

Trading Strategies help traders to take wiser decisions; since trading strategies are based on rules; and trading happens within pre-decided parameters; it reduced the probability of emotions coming in the way of taking important decision.

Trading strategies can be executed manually or via automated software. Manual strategy is done by trader himself and it requires a great deal of knowledge, insight and experience in the trading market. In manual trading there are more chances that the trader will deviate from his chosen strategy at the last moment as a result of temptations caused due to volatility in the market; however if trader gives in to temptation, he mostly ends making on a bad note.

Automated trading strategies are computer driven and computer action is driven based on data fed into it, by traders themselves of with the help of trading signals; their advisors, or mentors. Automated trading works on its own on behalf of its trader once it is set and activated. It is suitable for traders who do not have time to keep a watch on the market round the clock. Or traders who want to take advantage of various time zones. With the help of automated trading everyone can trade at any time of the day by simply feeding in the entry and exit points in the computer in their chosen market condition. However, you can rarely find an auto-trader that makes money in long term. Many of them lose very heavily. So you have to be careful.

It has also been observed that sometimes one strategy works in several closely related market conditions provided they are over not optimized for a given timeframe or prevailing market condition and don’t use too much of current data. However, this phenomenon is not too common and, generally trading strategies are more popular as tailored solutions and are designed according to current market condition and trader’s preference.

In next part we shall discuss different styles of trading that can be engaged while devising trading strategies

Styles of Trading:

1. Mirror Trading: 

It is a type of trading where the trader simply identifies and shortlists successful traders and their strategies and based on his own investment goals and needs, mirrors those exact strategies to his own portfolio. You don’t need to be a genius to do this, however basic knowledge is essential as you will be required to study and understand various strategies of successful traders, and decide whether will work with you. Another advantage of mirror trading is that results of such type of can be accessed by paying a price, and can be compared openly, a facility not available with auto trading where information is held under wraps.

2. Technical Analyses: 

Technical Analysis  involves collecting & studying price volatility and volume of trade related to various financial instruments over a period of time. Technical analysis is more about trader’s instant reaction over a change in market scenario than looking at the overall and bigger picture and basing one’s decision on that, like the fundamental analysts do.

3. Fundamental Analyses:

Trading based on fundamental analysis (link to previous post) is a trading style that is adopted by long term investors who prefer to look at the larger picture, observing and studying the fundamental strengths and weaknesses of the company rather than buying & selling instruments they are holding on an impulse or on criteria like trend and what an average investor is doing and which thought pattern is he following, fundamental traders and analysts are more or less indifferent to actions of traders who base their trades on short term changes in price.

4. Qualitative Trading:

Qualitative trading is a trading technique chosen by the technically savvy, formally educated sophisticated traders; these traders have generally studied subjects like math and statistics at higher level and have learnt the skill to scan through the extensive data base and identify repetitive and peculiar patterns over a period of time to shortlist. Then they evaluate these patterns and apply it while executing their own trades.

This type of trading is not about checking underlying factors at macro or micro level; studying policies or the company etc; trend trading is merely about noticing prevalent trend and joining it. Traders who decide to go with Trend trending have generally identified the trends by using one or more of the following; calculating current market price; identifying channel breakouts; by way of moving average etc they arrive at the general market direction which helps them generate signals for trading. The most outstanding feature of trend trading is that the trader can make profits in both falling as well as rising market.

6. Mean Reversion:

Mean reversion is based on mathematical trading style; and is based on a single assumption that stocks highest and lowest prices are never going to be constant; and stocks price has a tendency to shift to the average price over a period of time. Traders following mean reversion to begin with pick the trading range for the chosen stock; post which they calculate the average price with the help of analytical techniques as it is associated with earnings, assets, and so on. After making these calculations if it is found that the market price is more than the average price then the stock is considered to be a good buy as prices are expected to go up; and when average price is more than market price and in such a condition it is expected that market price will drop.

7. Volatility:

Volatility is also one of the trading styles wherein stocks are traded based on market fluctuations. Generally short term trades are conducted when stocks are traded based on volatility. Volatility is the variation in price observed under a timeframe.

Price Action Trading Style as the name itself suggests is a trading that is based on studying basics of price action or price change. Price action trading can be considered a part of technical analyses trading however it is a trading style in itself and required in-depth knowledge about various aspects, triggers etc related to this type of trading. Also, the underlying strategies adopted by price action traders are more or less similar to those adopted by Floor and Tape traders. This type of trading is also not foolproof and does not necessarily work in all specific market condition that it previously worked on because of ever changing market dynamics.

Price action trading is a very detailed subject and needs to be studied in depth if the trader wishes to base his/her trades on it and become successful in the long term.

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