The financial markets have been a source of great wealth for many individuals over the years. It is, therefore, no wonder that most individuals usually try their hand in these markets. But like in other life endeavors, to succeed, one needs an effective strategy. A trading strategy
is an essential component of an investor’s wider trading plan. Basically, a trading strategy is a set of objective rules that define the conditions that must be met for trade entries or exits to occur.
There is a general misconception that the more complex a strategy, the more effective and profitable it is. This is particularly common among new investors who feel that a strategy with multiple moving parts leaves little margin for error. In reality, though, such a strategy can lead to analysis paralysis and eventually confuse the trader. Experienced investors, on the other hand, have realised that simple strategies for identifying trading opportunities in the market are the most effective because they allow for quick reactions and less stress.
Here are some of the simple yet effective strategies that have stood the test of time: Trading with moving averages
Moving averages (MAs) are the oldest and most popular technical analysis indicator and over the years, they have proved to be very effective. MAs are generally constructed by plotting the closing prices of a particular financial asset, such as oil or gold, for a particular time period. Because they are simply mathematical averages of prices, MAs move in line with the asset’s price. That is, when the price of an asset drifts higher, the MAs will reflect this by also moving higher.
Investors have, over the years, utilised moving averages in two major ways: (1) as a trend filter and as (2) an entry trigger. As a trend filter, investors use MAs to develop bias in their trading strategies. For example, if prices are above a particular MA line, investors would decide to only pursue Buy trades for the underlying asset in that particular trading session. After creating a bias, investors can then use other filters or indicators to determine whether the particular trade idea should be pursued.
Investors also use MAs as a trade entry trigger. In an uptrend, for instance, the strategy would be to initiate only Buy trades since the price of the asset is moving upwards. But buying in a bull market, as stock market traders know, does not guarantee profitability. It is important to find optimal price entry points where the trading risk is minimised and potential profitability is maximised. MAs help traders with this because they usually act as dynamic support and resistance lines. A support line can be understood as the lowest price point an asset will drop too before it starts to gain support from investors and starts moving up again. On the flipside, a resistance line can be viewed as the highest level an asset’s price will move before it starts getting resistance from investors and moving down again. For instance, in an uptrend, optimal entry points can be found at or near a bullish moving average line when prices have retraced from a support line.
Additionally, investors use moving averages to determine trend momentum. This is done by observing the steepness of a MA line - the steeper the slope, the stronger or more momentous a trend is. Generally, in a momentous trend, investors pursue more aggressive trading strategies to take advantage of the trending asset prices. Trading using stochastics
The stochastic indicator is an oscillator that helps investors to determine overbought and oversold conditions in the market. The indicator has two lines (one faster than the other) that oscillate between values of 0-100. There are also two horizontal lines at values 20 and 80. When the stochastic reading is above 80, the underlying asset is deemed overvalued and traders should expect a drop in prices. Likewise, when the stochastic reading is below 20, the underlying asset is deemed undervalued and a rise in prices can be expected. Nonetheless, to only identify oversold and overbought conditions is an overly simplistic way of using stochastics. Investors identify more quality trade setups by also observing stochastic crossovers and divergences.
Using the stochastic crossover, a quality Buy signal is identified when both stochastic lines are below the ‘20’ level and the faster moving line has crossed the slower line upwards to indicate that prices are gaining bullish momentum or increasing. Similarly, a quality Sell signal is identified when both stochastic lines are above the ‘80’ level but the faster moving line has crossed the slower line downwards to indicate that prices are gaining a bearish momentum or decreasing.
Investors also look out for stochastic divergences in the oversold and overbought regions so as to identify more quality trading opportunities. To place a Buy trade, a positive divergence must occur. A positive divergence occurs when prices are forming lower lows but the stochastic indicator is forming higher lows in the oversold region. This is an early signal that an upward reversal is about to take place. In the same manner, Sell trades will be executed when negative divergences occur. Negative divergences occur when prices are forming higher highs but the stochastic indicator is forming lower highs in the overbought region, which is a signal that a bearish reversal is about to happen in the market and the asset’s price is likely to decrease. Trading the news
Economic data releases are the major catalysts of price movement in the financial markets. Like any other good strategy, the price of a financial asset depends on supply and demand, and economic data is some of the best pointers of future variations in that regard. There are numerous economic news reports released 24/7 which can spur volatility in the underlying assets and since money in the financial markets is made out of price movements, it is important that investors track these releases.
A great way to track these releases is by utilising an economic calendar tool which is available on many finance sites and binary options broker sites
. This effective tool lists all the news scheduled to be released on any given day or week as well as the asset it might impact. The news are also rated using a three-star system. News rated three-star are likely to have high impact on the prices of the underlying asset and these are the ones investors should watch out for.
Since trading around news releases is very risky in most markets, investors usually prefer to trade their favorite assets in the binary options market where there are simple but innovative contracts that can help traders maximise their potential profitability while minimising their risks during such times. The best strategy is usually to trade the 60 Seconds trade option which can be found on most online trading platforms. These contracts only have an expiry time of 60 seconds and if an asset’s price is trending in a particular direction, a trader can make a few trades consecutively and take advantage of the price movement. Final word
There is no doubt that trading online is risky yet if you take the time to understand how factors impact asset price movements, you are more likely to predict the direction that the price of an asset will move in the future. Applying trading strategies is an effective way to manage trading risks. These three strategies presented here are simple, easy to understand and to apply plus, they can help investors of all levels to achieve consistent profitability in the financial markets.