How to be a strategic trader: The ultimate guide to trading strategies

Trading CFDs (Contract For Difference) in financial markets can be highly rewarding, but it requires strategic planning, discipline, and knowledge. In this ultimate guide, we explore different types of trading strategies and trading styles adopted and applied by successful traders. Understanding and applying these principles is key whether you are a beginner or an experienced trader.

It is important to note that when trading CFDs and trying out a new strategy, or if you’re just starting out as a trader, it is inevitable that you will experience some losses. However, applying a well-thought-out strategy can potentially enhance your trading performance and protect you from making mistakes and suffering unnecessary losses.

The basic idea that makes strategic trading popular is that strategy rules and guidelines can be tested to give more or less consistent results. On the other hand, trading randomly or based on your mood at a certain time is very likely to lead to losses because any profits you do make can’t be repeated without more trial and error.

Content

1. Understanding trading strategies
2. Types of trading strategies
3. How to choose a trading strategy
4. Designing your CFD trading strategy
5. Testing and practicing your strategy
6. Creating a trading plan
7. Start applying strategic trading

Understanding trading strategies

When trading CFDs in the financial markets, trading strategies are the backbone of successful trading endeavors. A trading strategy is a comprehensive plan developed to achieve a profitable return by systematically buying and selling securities. It encompasses a set of rules and guidelines based on technical or fundamental analysis to identify potential trading opportunities and manage risks effectively. While the primary goal is to maximize returns, a robust trading strategy also aims to minimize losses by incorporating disciplined risk management practices. Understanding and crafting effective trading strategies is crucial for traders at any level, as it provides a structured approach to navigate the complexities of financial markets.

Although similar, strategies and styles of trading are different.

What is a trading strategy?

A trading strategy is a predefined, systematic approach to trading that outlines specific criteria for entering and exiting trades, managing risks, and allocating capital. It can be based on various forms of analysis, including technical indicators, chart patterns, and fundamental factors. Popular trading strategies include momentum trading, where traders capitalize on the continuation of existing trends, and trend trading, which involves following the market's overall direction. These strategies provide traders with a framework to make informed decisions and maintain consistency in their trading activities. By adhering to a well-developed trading strategy, traders can avoid emotional decision-making and enhance their chances of achieving long-term profitability.

What is a trading style?

A trading style, on the other hand, refers to the overall approach or methodology a trader uses based on their time horizon, risk tolerance, and personal preferences. Styles of trading can vary widely, including day trading, swing trading, and position trading. Day traders execute multiple trades within a single day, seeking to profit from short-term price movements. Swing traders hold trading positions for several days or weeks to capitalize on medium-term market trends. Position traders take a long-term view, holding positions for months or even years based on fundamental analysis and broader market trends. Each trading style requires different skill sets and levels of commitment, and traders often choose a style that aligns with their lifestyle and risk appetite.

Distinguishing trading strategies from trading styles

While trading styles define the general approach and time horizon a trader adopts, trading strategies are the specific methods employed within that framework to identify and execute trades. For example, a day trader might use a momentum trading strategy to capture intraday price movements. In contrast, a swing trader might apply a trend trading strategy to benefit from multi-day market swings. Conversely, a position trader might use a value investing strategy based on fundamental analysis. The key distinction is that trading styles represent the broad methodology and time commitment. In contrast, trading strategies are the precise tactics and rules used to make trading decisions within that chosen style. Understanding the interplay between trading styles and strategies allows traders to develop a cohesive and effective trading plan tailored to their individual goals and market outlook.

Types of trading strategies

Day trading strategy

Sometimes referred to as a trading style, day trading involves buying and selling securities within the same trading day with the goal of capitalizing on short-term market movements. Day traders typically use leverage to increase the potential return on investments although leverage has the potential to multiply your gains as well as your losses if the markets don’t move in your favor.

Swing trading strategy

Swing traders hold positions for several days to weeks, and aim to profit from price swings in the market. Swing trading requires a good understanding of technical indicators and chart patterns. Some also consider swing trading a trading style.

Scalping trading strategy

Scalping is a short-term trading strategy that focuses on making small profits on very small price changes. Scalpers often trade large volumes of securities and hold positions for a few seconds to minutes.

Position trading strategy

Position traders hold positions for weeks, months, or even years. Position trading is based on long-term market trends and fundamental analysis. It requires patience and a deep understanding of market fundamentals.

Algorithmic trading strateAlso referred to as automated trading or algo trading, algorithmic trading involves using computer algorithms to execute trades based on predefined criteria. Algorithmic trading can process vast amounts of data and execute trades at speeds impossible for humans.

Seasonal trading strategy

Seasonal trading leverages historical patterns and seasonal trends to predict market movements during specific times of the year. Traders using this strategy analyze recurring events, such as holidays or earnings seasons, to anticipate price fluctuations and position their trades accordingly.

Price action trading strategy

Price action trading focuses on making decisions based on the actual price movement on the chart, rather than relying on indicators or algorithms. Traders interpret candlestick patterns, support and resistance levels, and other chart formations to forecast future price movements.

Trend trading strategy

Trend trading involves identifying and following the overall direction of the market, whether upward or downward. Traders using this strategy aim to profit from sustained movements by entering positions aligned with the current trend and holding them until the trend shows signs of reversal.

Range trading strategy

Range trading capitalizes on markets that oscillate between established support and resistance levels. Traders buy near the support level and sell near the resistance level, profiting from the predictable price movements within the range.

Breakout trading strategy

Breakout trading seeks to capture gains when the price moves beyond a defined support or resistance level. When applying a breakout trading strategy, traders enter positions when the price breaks through these levels with significant volume, anticipating continued momentum in the direction of the breakout.

Reversal trading strategy

Reversal trading aims to identify points where the market will change direction. Traders look for signals of trend exhaustion or overextended price movements to enter trades that capitalize on the anticipated reversal.

Gap trading strategy

Gap trading takes advantage of price gaps that occur when the market opens significantly higher or lower than the previous close. Traders look for gaps that suggest a continuation or reversal of the current trend and enter positions accordingly.

Pairs trading strategy

Pairs trading involves trading two correlated securities simultaneously, going long on one and short on the other. The strategy aims to profit from the relative performance between the two securities, regardless of the overall market direction.

Arbitrage trading strategy

Arbitrage trading exploits price differences of the same asset in different markets. Traders buy the asset at a lower price in one market and sell it at a higher price in another, locking in risk-free profits from the price discrepancy.

Momentum trading strategy

Momentum trading seeks to capitalize on the continuation of existing trends. Traders enter positions when they see strong price movement in a particular direction, riding the momentum until signs of a reversal or slowdown appear.

News trading strategy

A news trading strategy involves making trading decisions based on the release of significant news or economic data. News traders use fundamental analysis to quickly react to news events that can cause sharp price movements, such as earnings reports, economic indicators, or geopolitical developments.

End-of-day trading strategy

End-of-day trading focuses on making trading decisions near the close of the market. Traders analyze the day's price action and market conditions to place trades that will be held overnight, aiming to benefit from price movements in the next trading session.

How to choose a trading strategy

Choosing the right trading strategy is crucial for your success as a trader and should be tailored to your individual goals, risk tolerance, and lifestyle. Start by evaluating your financial objectives and how much time you can dedicate to trading. Consider your risk appetite—some trading strategies, like scalping and day trading, involve higher risks but can offer quicker returns. Other trading strategies, like position trading, require patience and a long-term outlook. Assess your market knowledge and analytical skills; trading strategies like price action trading or news trading require a good understanding of market behavior and quick decision-making.

It’s essential also to consider the assets and financial instruments you are trading, as certain strategies may work better for specific financial markets. Experiment with different strategies through paper trading or using a demo account to find what aligns well with your personality and strengths, and always be prepared to adapt and refine your approach as you gain more experience.

Finally, it's important to note that there is no one ‘best’ trading strategy, as no strategy is foolproof. The ‘best’ trading strategies are the ones that match your trading style and risk tolerance. Practice and master your trading strategies and be flexible to adapt to market conditions, and even then, you can’t be 100% certain that the financial markets will move in your favor. Therefore, monitoring your trades and applying proper risk management techniques is crucial.

Trading is not gambling

Before looking at how to design a strategy, it’s worth remembering the key principle that trading and gambling are two different things. Betting and gambling are recreational activities: there are too many variables and not enough data to have a ‘strategy’ for gambling in the usual sense of the term.

Trading on the other hand is somewhat like investing with the budget and timeframe of betting, at least as far as the average person is concerned. While trading can be enjoyable, it’s not a game, and when you’re trading, you’re not playing. It’s possible to make consistent profits over months and years with logical and strategic trading. If this weren’t the case, you wouldn’t hear about many people all over the world making small (and sometimes big) profits from trading through CFDs.

It’s important to note that many people also lose money through trading. One of the key determiners (Although not the only one) of whether you make or lose money with CFDs is your attitude. Specifically, treating trading as if it’s gambling will almost certainly lead to the loss of your account.

Designing your CFD trading strategy

Every strategy has a certain number of rules and elements. Some trading strategies have more and other trading strategies have less. These rules may be about when to trade, what to trade, how much to trade, and a vast variety of other things. The point of setting rules for each strategy is so traders know how to behave and what actions to possibly take in a particular situation and avoid emotional decisions.

Key elements of a trading strategy

• Risk management: This is the process of identifying, assessing, and controlling threats to your trading positions in order to avoid losing money rapidly. Trading involves risk, so managing it is crucial for trading success. It involves knowing when to exit trades, setting stop-loss orders, determining position sizes, and diversifying portfolios.
• Technical analysis: This involves analyzing statistical trends from trading activity, such as price movement and volume. Traders use various technical indicators like moving averages, relative strength index (RSI), and Bollinger Bands to make informed decisions.
• Fundamental analysis: This focuses on evaluating a security's intrinsic value by examining related economic, financial, and other qualitative and quantitative factors. Traders look at company earnings, revenue, growth prospects, and industry conditions.
• Market sentiment: Understanding the market's mood can help traders anticipate price movements. Tools such as the VIX (Volatility Index) and investor surveys can provide insights into market sentiment, which affects market movements.

Setting up your trading strategy rules

Trading strategy rules need to be as specific as reasonably possible. Having vague rules open to many interpretations is not a good idea because it opens the door to thinking emotionally. Instead, look for a system of strategic trading that removes the role of guesswork as much as possible, and discourages or prevents you from making random trades.

Simplicity is very important at the beginning. The number of rules should not be very large; equally, you should avoid using complicated concepts. This is because complexity usually means there are more ways for things to go wrong. If you test a simple strategy and find that it works, there’s no reason not to add more rules, modify the existing ones, or apply more advanced trading tools later down the line as your knowledge and experience advance.

The 6 basic rules for strategic trading

In the beginning, start with a strategy that's easy to articulate. Your rules should be clear enough to share with another trader without struggling to recall details. These six rules are a prime example, widely adopted by many traders as a foundation for their financial instruments trading approach.

Rule 1: Follow the primary trend for the financial instruments you're trading, referencing the four-hour and daily charts to gauge market conditions.

Rule 2: Maintain a risk-to-reward ratio of at least 1:2, basing stop-loss and take-profit levels on support and resistance rather than arbitrary pip numbers to navigate market volatility.

Rule 3: Initiate entry and exit of trades only during the peak hours for the traded financial instruments, aligning with most trading strategies.

Rule 4: Engage in buying only in the absence of nearby resistance, and sell only when support isn't close, applying basic trading techniques.

Rule 5: Trade when one currency is distinctly weaker or stronger, like buying EUR against USD only if EURGBP and EURJPY are also ascending, and apply fundamental and technical analysis.

Rule 6: Practice with a demo account under various market conditions for several months before moving on to trade with micro lots (0.01 lot).

These six rules, while straightforward, form a solid basis for strategic trading with financial instruments. They're not a profit guarantee, as market conditions can be unpredictable. Yet, they do provide a structured approach that is more likely to lead to success than random trading.

Most of the time it’s possible to make specific rules that deal with a mistake or area of improvement for you personally:

Suppose a trader often makes the mistake of buying into strength and selling into weakness and wants to avoid entering at extreme points. In that case, they might make the rule to ‘always use a limit order to enter x pips from the latest extreme, never a market order.’ If they stick to this rule of using buy and sell limits consistently, they can avoid repeating the same mistake.

Testing and practicing your strategy

Before applying a strategy, you must test it. You need to know that your system works before you risk real money. Any new strategy you develop should be tested with a demo account for at least a few weeks under various market conditions.

If your strategy results in consistent losses on a demo account, this means that it’s faulty. Don’t be afraid to reconfigure some parts of it and retest it. Every trader experiences some initial setbacks on the demo account when they are developing their strategy. Keep going, testing, and modifying until you reach your desired objective. If your trading strategy leads to consistent profits on your demo account, it might be ready to be used on a live account with real money.

Rules for practicing

When testing and practicing your trades with the objective of arriving at some profitable trades, there are some steps and rules to follow. You don’t necessarily have to use a trading account to practice, but it would help to consult the history of the demo account you’ve been using so far.

1. Consider the losing trades you’ve made since you started practicing. Is there anything you could’ve done differently to avoid losing money rapidly or even minor losses?
2. Specifically, try to design a rule or rules to avoid repeating any mistakes you’ve made.
3. A very simple example might be if you experienced a large loss from a trade without a stop loss order, you could add the rule ‘Never trade without a stop loss order or take profit order.’
4. If you’ve been prone to overtrading, you might add the rule ‘Never open new trades when your margin level is less than 200%.’
5. You should remember during this exercise that you will always suffer some losses. You can’t profit from every trade, but you can minimize losing trades and reduce their likelihood of happening again.

There are three things to keep in mind when testing your strategy:

1. No strategy is perfect
2. Don’t forget psychology
3. Testing must be realistic
4. No strategy is perfect

No strategy is perfect

When trading any financial market, no approach is flawless, including the different trading strategies mentioned. Should your trading technique, bolstered by technical analysis, fail to yield gains from every transaction, it's no cause for alarm. The key isn't to secure a profit with every attempt at buying and selling financial instruments; rather, the goal is to ensure your gains are more than your losses over time, leading to an overall positive outcome.

Regrettably, many traders grapple with market volatility and may hastily dismiss a strategy after a few minor setbacks, mistaking short-term fluctuations for long-term ineffectiveness. Contrary to swift judgment, trading opportunities should be evaluated with patience, and the success of a strategy should be gauged over a sustained period. A sensible time frame to judge the viability of following market trends might span from a couple of weeks to an entire month or even longer.

Don’t forget psychology

When exploring trading opportunities, it's crucial to acknowledge that the trading process involves more than just spotting potential wins; it includes understanding the psychology behind each decision. Identifying winning trades typically hinges on the analysis of financial instruments through technical analysis, which can help forecast future price movements.

It's also vital to recognize that the emotions tied to demo trading differ vastly from those experienced when trading with real money. While demo losses may not sting, the psychological impact of real financial losses can be significant. New traders often overlook the challenge of managing their emotions, especially when small price movements can trigger a strong reaction.

A successful trader knows the importance of having a solid strategy for entry and exit points, which is essential in maneuvering through the market's ups and downs. Remember, mastering the psychology of trading is as important as any strategy, if not more so. Discipline in adhering to your strategy, especially in the face of market volatility, is a key component in the pursuit of a successful trading career.

Testing must be realistic

Testing your trading techniques with a demo account is a key step before diving into the live markets. It's vital to treat this practice as you would a real account to grasp the realities of entry and exit strategies, as well as to identify genuine trading opportunities. For instance, if you have €200 for actual trading and plan on using 1:30 leverage, you must mirror these conditions in your demo account setup.

Many beginners fall into the trap of pumping their demo accounts with unrealistic sums of money, often in the hundreds of thousands, and utilizing excessively high leverage. This approach not only skews the perception of risk but also impairs the ability to recognize significant price movements and chart patterns through technical analysis. Such unrealistic testing doesn't prepare you for applying any popular trading strategy with your hard-earned cash on the line.

Practicing trading requires a realistic approach. If your demo account trading doesn't reflect what you'll do with real money, you will likely foster bad habits and a false sense of security. Remember, the goal is to simulate real-life trading conditions as closely as possible to ensure that you’re ready to capitalize effectively on the live markets when the time comes.

Creating a trading plan

Whether you choose to be a day trader, or use a trend trading or swing trading strategy, part of being a strategic trader is applying your chosen trading strategies to your overall trading plan. A trading plan is a comprehensive decision-making tool for your trading activities.

Your trading plan should include:

• Trading goals: Define your financial goals, risk tolerance, and time horizon.
• Market selection: Decide which markets you will trade, such as stocks, forex, commodities, or cryptocurrencies.
• Entry and exit criteria: Specify the conditions under which you will enter and exit trades. This includes technical indicators, chart patterns, and fundamental factors.
• Risk management rules: Establish how much capital you are willing to risk on each trade, your maximum daily loss, and your overall risk management strategy.
• Performance evaluation: Regularly review your trades to assess what works and what doesn't. Adjust your strategy accordingly.

Start applying strategic trading

Putting your tested strategy into practice comes with its own set of challenges. Having the perfect strategy doesn’t matter if you don’t have the discipline to stick to it. It’s critical to follow the rules you’ve made for your trading, especially if you’re using a shorter-term strategy. In this case, rules aren’t made to be broken.

Traders also need to be sure that their strategy is appropriate for the psychological mindset that comes with trading for real, which is often different from trading on a demo account. If you find that your strategy is good during simulated trading but too complicated in practice, it might be time for a rethink. Equally, it might take a while to develop a clear personality and style regarding trading. Some traders are inherently more conservative or more aggressive than others, so your strategy should play to your strengths while trying to minimize your weaknesses.

Additionally, you may find that certain platforms are too complex and, in the beginning, you may prefer to use a simpler trading platform or mobile trading app.

To summarize, consider starting off with a simple strategy, basic rules, and an easy-to-navigate platform. Test your skills and strategy on a demo account first, and as you advance in your skills and trading acumen, consider trying out one advanced technique or system at a time. And remember, two brains are better than one; think about following some trading experts and mentors, such as Exness Team Pro, to help guide you and potentially avoid some unnecessary mistakes.