Trading Strategies For 2019
Reading time: 44 minutes
Did you know that having an effective trading strategy to help you navigate the financial markets can vastly improve your trading performance and decision making over time? But what makes for an effective trading strategy? More importantly, how can you be informed of the best trading strategies for this year and trade them completely risk-free?
This trading strategy guide consists of six different types of strategy methods and eleven trading strategy examples, as well as, a wealth of information on how to start using and testing online trading strategies today.
What Are Trading Strategies?
When trading the world's financial markets, a trader is tasked with making a decision on whether to buy or sell a security, or whether to stay on the sidelines. The tools available to traders make these decisions vast and varied, and can include everything from analysing news announcements or company fundamentals, identifying statistical anomalies using historical data, or simply using technical analysis to study the past behaviour of market participants using price charts.
Trading strategies are used to streamline the process of parsing this information by creating a set of rules, or a methodology, to make a trading decision. After all, the vast amount of trading techniques and strategic methods can be overwhelming for any trader, no matter how much experience they have.
The components of an effective trading strategy may include a step by step process in checking fundamental news announcements, a big picture and near-term picture of the trend of the market, specific trading indicators that can help in buying and selling decisions, rules for trade sizing, or overall portfolio risk management. The individual components will vary depending on the types of strategic methods and style the trader is utilising, as you will discover in the strategy example section further down this article.
What Are The Best Markets For An Effective Trading Strategy?
Before we look at some of the different types of strategies you can utilise, you may be thinking about what markets are best to apply trading strategies to. Since an effective trading strategy is simply a sum total of rules and conditions which assist in making a trading decision, a strategy can be customised to the specific market being traded.
This is why many traders choose to employ trading strategies across a broad range of markets including:
While there are various financial products that can be used to transact in these markets, one of the more popular methods is through CFD trading, or Contracts for Difference. Using this vehicle, traders can speculate on rising and falling prices without owning the underlying asset. There are also some other advantages such as:
- Leverage - a retail client can trade positions up to thirty times of their deposit. A trader who is categorised as a professional client can trade positions up to five hundred times their balance.
- Trade in any direction - Go long or short on a market in order to trade through different and ever-changing market conditions.
- Access global markets - trade the forex market, global stock markets, commodities and global stock market indices.
CFD trading is useful for most of the trading styles and strategy methods you will learn in the next section. You can learn more about the different CFD account types here. For now, let us look at the different types of trading strategies that are available to you.
The Six Major Types Of Trading Strategies
There are multiple types of trading techniques and strategy methods to choose from. While the number of strategy methods may seem daunting, it is also one of the reasons individuals from all walks of life participate in the financial markets - there is usually something for everyone!
Whether short-term trading, long-term trading, or investing, most techniques and methods will fall into the following types of strategy methods:
1. Day Trading Strategies
Day trading is a style in which traders buy and sell multiple securities within a single trading day, often exiting by the end of the day. In fact, it is rare for active day traders to hold positions overnight, let alone several days. The most common chart timeframes used in day trading strategies are the four-hour, one-hour, thirty-minute and fifteen-minute charts.
Many new traders gravitate towards day trading as they are enticed by the possibility of making profitable trades multiple times, in just one day. While day trading can certainly be lucrative, it is also the most challenging to master and can result in big losses for the untrained. In fact, it is not advisable for most to make multiple high-risk financial decisions in a short period of time, unless they have gone through significant training and conditioning.
How To Create A Day Trading Strategy
While day trading is challenging, it is possible to learn day trading techniques and practice a day trading strategy until it is mastered. Whether it is day trading stocks or day trading forex, there are some key elements to crafting a day trading strategy, such as:
- Which markets will you trade on? Many focus on day trading stocks, but day trading techniques can be used on any major market. As day traders take many trades for very short term price movements, choosing markets which offer low commissions and small spreads are essential.
- What timeframe will you focus on? There are multiple day trading timeframes to choose from. Pick a timeframe that suits your availability, so you can become familiar with how it moves.
- What tools will you use to enter and exit trades? When learning how to day trade, there are vast amounts of trading indicators available to you. Focus on one or two to really master how they work.
- How much will you risk per trade? Trade sizing and risk management are very important. You don't want to risk too much per trade as it is likely you will have a string of back to back losers at some point in your trading career.
Day Trading Strategy Example
Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
The chart above shows the price behaviour of a particular market across a two-day trading period. Having a day trading strategy written down is hugely important, as the day trader is faced with lots of random price movements that form multiple market conditions and trends (upward, downward and sideways price movement). Each of these requires different day trading techniques.
Trading indicators, such as moving averages, are popular for day traders as they can be useful in differentiating between changing market conditions. Let's plot a moving average on the same price chart as above, as a day trader would.
The blue line represents a twenty-period moving average of the closing price of the prior twenty bars. When creating a day trading strategy, the trader can use this to create a rule, or condition, for trading:
- Rule 1: When the price is above the moving average, only look for long, or buy, trades.
- Rule 2: When the price is below the moving average, only look for short, or sell, trades.
These two simple rules can help streamline and focus the day traders decision-making process. The number of rules within an effective trading strategy will vary. In this example, the moving average has helped to filter for direction. The trader still needs conditions for timing entries and exits, as well as risk sizing and overall portfolio risk management.
You will find more detailed trading strategies when we cover specific strategies for forex, stocks, commodities and indices after we have finished going through the six major types of trading strategies, within this section. For now, let's focus on what is swing trading - the second type of trading strategy.
2. Swing Trading Strategies
What is swing trading? Swing trading is a method in which traders buy and sell securities with the purpose of holding for several days and, in some cases, weeks. Swing traders, also known as trend-following traders, will often use the daily chart to enter trades that are in line with the overall trend of the market.
Some swing trading strategies only use the technical analysis of a price chart to make trading decisions. However, it is common that swing trading strategies also use fundamental information, or multiple time frame analysis, as more detail is required to help in holding trades for several days or longer.
Swing Trading Strategy Example
One of the more popular trading techniques for swing trading is to use trading indicators. There are many different types of trading indicators in the marketplace and they all have pros and cons to them. So what are the best indicators for swing trading? Many swing traders will use the Stochastic Oscillator, MACD or Relative Strength Index (RSI) to identify clues in price continuing a trend or changing direction.
Ultimately, the best indicators for swing trading are going to be the ones you have tested and have learnt to become familiar with. Let's look at an example of a swing trading chart:
Most swing trading strategy charts have three components:
- Daily chart bars, or candles. This means each bar, or candle, represents one day's worth of trading.
- A trend filter. In the above example chart, a fifty-period moving average is used as a trend filter and is denoted by the red wavy line moving through the price bars.
- An overbought and oversold indicator. In the above example chart, a Stochastic Oscillator is used to identify overbought and oversold conditions and is found at the bottom of the chart.
Since a trading strategy is simply a methodology to help in a trader's decision-making process, a trading strategy can be made using the three components listed above. For example:
- Rule 1: When the price is trading above the moving average, only enter long, or buy, trades. When the market is trading below the moving average, only enter short, or sell, trades.
- Rule 2: Only enter a long trade if the Stochastic Oscillator is below 20, as this represents the oversold territory. Only enter a short trade if the Stochastic Oscillator is above 80, as this represents the overbought territory.
Using these two basic rules would result in traders identifying entry levels in the gold boxes found in the chart below:
These simple rules can serve as a starting point to help the trader in trading with the trend and timing their entries. Of course, proper swing trading strategies will include additional rules to address specific bar patterns, or support and resistance levels for entry price and stop loss placement, as well as higher timeframe analysis to identify take profit levels - as swing traders aim to hold trades for several days or more.
When using the best indicators for swing trading, it can help to systematise an approach within the overall trading strategy so you're not left wondering what the indicator is actually telling you. Preparation is key to success when trading the markets.
3. Position Trading Strategy
Position trading is a style in which traders buy and sell securities for the purpose of holding for several weeks or months. A position trader will typically use a combination of daily, weekly and monthly charts, alongside some type of fundamental analysis in their trading decisions. Essentially, a position trader is an active investor, as they are less concerned about short-term fluctuations in the market and look to hold trades for a longer term.
The key focus for a position trader is the reward to risk of a trade. Typically, as a position trader is looking to hold trades for several weeks or months, they often have lots of very small losing trades before one big winning trade. This allows the position trader to risk small amounts per trade, in order to increase the frequency of the number of trades taken so they can diversify their portfolio.
Position Trading Strategy Example
Most position trading strategy charts have three main components:
- Daily chart timeframe or above (weekly or monthly chart).
- A trend filter. In the above example chart, a one hundred period moving average is used as a trend filter and is denoted by the orange wavy line moving through the chart.
- A trend reversal momentum indicator. In the above example chart, a MACD Oscillator is used to identify changing momentum and is found at the bottom of the chart.
As trading strategies are simply a set of rules and conditions to help in a trader's decision-making process, a trading strategy can be made using the three components listed above. For example:
- Rule 1: When the price is trading above the moving average, only enter long, or buy, trades. When the market is trading below the moving average, only enter short, or sell, trades.
- Rule 2: Only enter a long trade if the MACD Oscillator is above 0, as this represents momentum turning bullish. Only enter a short trade if the MACD Oscillator is below 0, as this represents momentum turning bearish.
In the chart above, the period in which both rules are met - price above the one hundred moving average and the MACD Oscillator above 0 - also represent the longest trending period. Of course, the trader still needs to find the right time to execute the trade and even if this is done correctly, momentum could turn in the opposite way, resulting in a losing trade.
However, it is these long-term trending conditions that a position trader tries to identify for trading purposes.
4. Algorithmic Trading Strategies
Algorithmic trading is a method in which the trader uses computer programmes to enter and exit trades. The trader will code a set of rules and conditions for the computer programme to act on. Algorithmic trading is also known as algo trading, automated trading, black-box trading, or robot trading.
Most algo trading strategies try to take advantage of very small price movements in a high-frequency manner. Many new traders are enticed by having algorithmic trading strategies entering and exiting trades when they are not there. Unfortunately, the lure of riches in algorithmic trading lends itself to many trading scams so beware.
While there are certainly more failed algo trading strategies than successful ones, there are a number of traders who manage to harness the power of algorithmic trading with discretionary, human trading. Many traders will use investment algorithms, or stock market algorithms, to help search for certain fundamental or technical conditions that form part of their trading strategies.
In effect, the algorithm acts as a scanner of potential markets to focus on. The trader can then focus on analysing the rest of the chart, using their own strategy methods and trading techniques.
5. Seasonal Trading Strategies
Seasonal trading involves trading the possibility of a repeatable trend year in, year out. Many markets often exhibit seasonal characteristics due to repeatable patterns in weather, government economic announcements and corporate earnings.
A seasonal trader would use these seasonal patterns as a statistical edge in their trade selection. So, while seasonal trading is not a buy, or sell, timing system it can give the trader the bigger picture context they need within their trading strategies and strategy methods.
Seasonal Investing Strategies
One of the more popular types of seasonal investing strategies forms part of a popular stock trading strategy. There is an old saying in trading, 'sell in May and go away'. This trading wit represents the typical seasonal weakness the stock market experiences during the summer months between May and October.
According to the Financial Analyst Journal in 2013, a study which observed this phenomenon found it did exist between 1998 and 2012 with stock returns giving higher returns in the November to April period than the May to October period. This doesn't necessarily mean the summer months were overall negative, however.
However, the observation does occur in another popular seasonal stock trading strategy which is the 'Santa Claus Rally'. This is the tendency for stock markets to rally during the last five trading days of the year and the first two of the new year. It is important to remember that seasonal trading merely provides an extra edge to a trading strategy. A seasonal trader would also look at other indicators and tools to identify markets which offer the best clarity to trade on and never solely rely just on one measure of analysis.
6. Investing Strategies
Investment strategies and trading strategies can have a lot of similarities but have one major difference. Investing strategies are designed for investors to hold positions for long-term, while trading strategies are designed to execute more short-term positions.
Most investment strategies are designed as a stock investment strategy as buying into profitable companies can, theoretically, have unlimited upside potential. When buying shares in a physical company, the downside is not unlimited. However, if the company goes bankrupt that can mean the investor will lose all of their investment.
When investors are formulating their rules or conditions, for their investment strategies, it is common to try and replicate the metrics of stand-out companies such as Amazon or Facebook. However, while this is no easy feat there are plenty of other companies that investors try to position themselves in according to specific investing styles, such as:
- Growth Investing. Strategy methods which focus on growth investing aim to identify stocks which exhibit the best 'growth' prospects. Generally speaking, this means identifying companies that are in the mature stage of their business cycle. For example, technology shares appeal to many growth based investors as these type of companies typically go public to raise capital, in order to mature the company even more.
- Value Investing. Strategy methods which focus on value investing aim to identify stocks which exhibit the best 'value' for money. Growth stocks are typically priced high as they offer the best future prospects. Value-based stocks are companies that are typically trading at a discount due to recent negative news announcements or poor management. Value investors will look for changes in the company's circumstances and invest in the turnaround story of the company.
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Now that you are familiar with the six major types of strategy, we can now look at the trading strategies for this year across forex, stocks, commodities, indices and CFDs. However, before you can learn and start implementing some of these online, it's important to have the right trading platform so you can access the very best trading tools for the job.
The Best Trading Platforms For Online Trading
Having the ability to access a stable and secure trading platform is essential in today's fast-moving markets. The best trading platforms allow you to view historical price charts of the instrument you are trading, as well as provide you with the order tickets you need to place and manage your trades.
Thanks to significant advances in technology, you can now have your charting platform and brokerage platform all in one place thanks to the Admiral Markets MetaTrader suite of trading platforms which include:
- MetaTrader 4
- MetaTrader 5
- MetaTrader WebTrader
- MetaTrader Supreme Edition (A custom plugin for MetaTrader 4 and MetaTrader 5, created by Admiral Markets and professional trading experts)
An example screenshot of the Admiral Markets MetaTrader 5 platform, accessed on April 28, 2019.
Through the platforms mentioned above, you can trade all types of instruments and trading strategies such as forex strategies, stock trading strategies, CFD strategies, commodity trading strategies and index trading strategies. In fact, you can access more than 8,000+ instruments, as well as news announcements and advanced trading tools.
Most importantly, with these platforms, you have access to a large library of trading indicators which can be very helpful when following and developing different trading strategies for different markets. Some of the world's most popular trading indicators are available completely free on all of the Admiral Markets MetaTrader trading platforms, such as the:
- RSI Indicator
- Bollinger Bands Indicator
- MACD Indicator
- Ichimoku Indicators
- And many more advanced trading indicators.
Admiral Markets offers professional traders the ability to significantly enhance their trading experience by boosting the MetaTrader platform with MetaTrader Supreme Edition. Gain access to excellent additional features such as advanced trading indicators like the correlation matrix - which enables you to compare and contrast various currency pairs, together with other fantastic tools, like the Mini Trader window, which allows you to trade in a smaller window while you continue with your day to day things. Get all of this and much more by clicking the banner below and starting your FREE download!
Now that you have access to some of the very best trading platforms on offer, let's look at the different types of online trading strategies across some of the world's most actively traded markets.
Trading Strategies For This Year
In this section, you will find a variety of trading strategies for different markets. It's important to remember that an effective trading strategy is designed to streamline the process of trading information by creating a set of rules, or methodology, to make a trading decision.
Most beginning traders believe an effective trading strategy is one that wins 100% of the time, and will spend most of their waking hours trying to search for a holy grail system. While some websites will market these 'holy grail systems' to the uneducated, it is worth remembering that they simply do not exist.
A trading strategy with sound risk management principles can give a trader an edge, over time. However, this will come with winning and losing trades. After all, anything can happen in the market at any point in time. The strategies below are designed to demonstrate the different possibilities available to traders, as well as act as a starting point to create a more thorough and detailed set of rules.
Let's get started!
Forex Trading Strategies
The foreign exchange market is ideal for nearly all different types of strategy such as day trading, swing trading, algorithmic trading and more. This is due to the fact that the forex market is open 24 hours a day, five days a week, making it one of the most liquid markets available to trade on.
EUR/USD Currency Trading Strategy
As the currency market is open Monday to Friday, instruments like the EUR/USD can exhibit multiple types of market conditions in a short period of time such as an uptrend, a downtrend and a sideways market range. This is why some traders use Bollinger Bands in their EUR/USD currency trading strategy.
Bollinger Bands are used to identify markets which are quiet, and often moving sideways, as well as markets that are showing increased volatility and are about to trend in a certain direction. The Bollinger Band tool itself is comprised of three lines. The middle line is a 20-day simple moving average (SMA) and is used to calculate the value of the upper and lower bands. These bands are two standard deviations away from the 20-day simple moving average (SMA).
As the standard deviation is a measure of volatility, many rules around the Bollinger Band focus on the upper and low band movements, such as:
- Rule 1: When the bands widen, the market is more volatile and could start to trend.
- Rule 2: When the bands contract, the market is less volatile and could develop into a sideways ranging market.
Let's have a look at an hourly chart of the EUR/USD with the Bollinger Bands indicator.
EUR/USD price chart showing Bollinger Bands contracting. Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
In the above chart, the three green lines represent the Bollinger Bands indicator. The gold coloured boxes represent periods of time where the Bollinger Bands are contracting. In most cases, the market's price action did move in a sideways range but for different amounts of time. There were other periods of time where the market did move in a sideways range but the Bollinger Bands had not contracted, meaning the indicator can often lag behind live price.
Now let us look at the period of times when the Bollinger Bands expanded.
EUR/USD price chart showing Bollinger Bands expanding.
In this chart, the blue boxes show times when the Bollinger Bands notably expanded. In most cases, price action did breakout on heightened volatility and move in a short-term trend, with some moving up and moving down. As these trend based moves offer larger price movements, using the widening of the bands as a rule in a Bollinger Bands forex trading strategy may prove to be more useful.
As the Bollinger Bands measure for volatility rather than the direction of the trend, some traders add a trend filter, such as a long-term moving average, within their Bollinger Bands forex trading strategy. This is because a moving average shows the average price for a certain number of historical bars - making it very useful to quickly identify the overall price direction. For example:
- Rule 3: Only buy, or trade long, when the price is above the 200 exponential moving average (200 EMA).
- Rule 4: Only sell, or trade short, when the price is below the 200 exponential moving average (200 EMA).
The orange line in the chart below shows the 200 exponential moving average (200 EMA), which shows the average price of the last 200 bars. As the exponential moving average is pointing downwards it signifies that - on average - price is moving downwards, helping us to quickly identify the overall trend.
The green boxes show the periods of time when the Bollinger Bands expanded and price breakouts to the downside, below the lower Bollinger Band, and in the direction of the longer-term moving average.
EUR/USD price chart showing Bollinger Bands expanding and price breaking the lower band in the direction of the 200 exponential moving average trend filter.
While the additional rules result in a lower amount of trading opportunities, it has served its purpose as an effective trading strategy, which is to streamline the decision-making process for the trader. At this stage, the trader may go on to add more rules regarding the specific entry price, stop loss price, target price and trade size to further streamline their decision making for any ongoing trading opportunities.
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Stock Trading Strategies
The stock market is ideal for nearly all different types of strategy such as a swing trading strategy, position trading strategy, trend following strategy, moving average strategy and a price action strategy, among others. As investors and fund managers tend to buy companies to hold for the long-term - in expectation of a stock price appreciation - trends tend to last longer in this particular market.
Both traders and investors participate in the stock market, lending itself to a multitude of strategy as listed above. While an investor will buy physical shares in a company, a trader may speculate on the price movement of a stock using CFDs which has certain advantages such as having the ability to trade long and short.
Netflix Position Trading Strategy
While there are thousands of companies to trade on, sticking to the companies you know and use on a daily basis can be the simplest place to start - such as trading on Apple, Amazon, Facebook, Tesla or Netflix stock. While there are some differences in how each individual stock trends, there are many more similarities. This makes using one stocks strategy, like a position trading strategy, tradeable on a wide range of global stocks.
Netflix price chart 2015 - 2019. Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
While the above price chart is of Netflix, it could represent any other stock price. As a company's stock price can often trend for quite some time - if it is in popular demand - many traders utilise the power of the exponential moving average to try and capitalise on trending periods.
One of the most popular ways of using the exponential moving average in a stock strategy is to look for a fast moving average to cross above a slow moving average, and vice versa. A fast moving average is one that is based on a smaller value of historical bars than a slow moving average, which is based on a higher value of historical bars. A set of rules could start with the following:
- Rule 1: Go long when the 8 exponential moving average crosses above the 21 exponential moving average.
- Rule 2: Go short when the 8 exponential moving average crosses below the 21 exponential moving average.
In this instance, the fast moving average is the 8-period moving average and the slow moving average is the 21-period moving average. Both numbers are Fibonacci numbers which are very popular in trading the financial markets. Let's have a look at what this looks like on the Netflix' price chart:
Netflix price chart with 8 exponential moving average (blue line) and 21 exponential moving average (yellow line).
In the chart above there are multiple occurrences of the moving average crossing over, both to the upside and the downside. In some cases, price did go on to trend for quite some time, while in other cases it turned in the opposite direction. Let's mark out the exponential moving average crossovers for further study:
Netflix price chart showing the 8 exponential moving average (blue line) crossing the 21 exponential moving average (yellow line).
The red vertical lines show the instances where the fast moving average crosses below the slow moving average. The green vertical lines show the instances where the fast moving average crossed above the slow moving average. What can we learn from this?
- On the five occasions where the 8 exponential moving average crosses below the 21 exponential moving average, only twice did the market keep on trending for an extended period to the downside. One issue with moving averages crossovers is that they may get you into the move late and may also give out a false signal.
- On the five occasions where the 8 exponential moving average crossed above the 21 exponential moving average, the market kept on trending higher most of the time. It is in these situations where the trader tries to gain a higher reward relative to the risk they are putting on.
The moving average crossover is essentially a position trading strategy that is well suited to a trend-following stock market strategy. While the placement of stop losses and take profit levels are discretionary it is important to understand this type of strategy will result in more losing trades than winning trades. However, the aim is for the winning trades to offer a reward that is multiple times the risk.
Therefore, it is important to use sound risk management techniques in order to keep the risk per trade small to allow for multiple losing trades before the possibility of a big winning trade.
CFD Trading Strategies
A CFD, or Contract for Difference, enables traders to speculate on the rise and fall of a market, without ever owning the underlying asset. When trading with CFDs there are two parties involved - the trader and the broker. Essentially, when the trader opens a long or short position, they enter into an agreement with the broker to pay the difference between the opening and closing price of the security they are trading.
The simplicity of entering and exiting trades, compared to other trading products, is just one reason many traders use CFD trading to trade a variety of markets such as stocks, indexes, commodities, bonds, ETFs and cryptocurrencies. One area that has gathered a lot of attention in CFD trading, is going short on Bitcoin.
Traditionally, to short Bitcoin, the short seller would have to borrow Bitcoins they do not own and then sell these on the open market at the market price. The short seller would then buy back those Bitcoins at a lower price in the future and their profit would be the difference of what they sold them for against the cost of buying them back. With CFD trading, the process is now much simpler as the short seller can open their platform and click sell.
Bitcoin CFD Trading Strategy
Cryptocurrencies such as Bitcoin tend to exhibit big price swings due to the volatile nature of the market, which is still relatively new. This lends itself well to a multitude of strategic methods, such as swing trading, position trading, day trading, and price action trading, among others.
Price action trading itself is also quite popular across other markets available for CFD trading. So what is price action trading? Essentially, it's the study of price patterns to identify what is happening now, in order to make a forecast of what could happen next. Let's have a look at how you can use a price action strategy for CFD trading Bitcoin, including going short Bitcoin.
Bitcoin against the US dollar (BTC/USD) price chart. Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
The above chart of Bitcoin against the US dollar (BTC/USD) shows a 34-period exponential moving average (34 EMA) plotted on price. As we have learnt from the strategies above, we can use a moving average as a trend filter within our trading rules:
- Rule 1: Go long when the price is above the 34 EMA.
- Rule 2: Go short when the price is below the 34 EMA.
While the moving average gives a directional bias, the trader still needs some rules to time a possible trade. This is where price action trading becomes useful. There are many patterns that can be used in price action trading, two of the most common are 'the hammer' and 'the shooting star'.
The hammer price action trading pattern, as shown above, is a bullish signal which signifies the failure of sellers to close the market at a new low and buyers surging back into the market, to close near the high.
The shooting star price action trading pattern, as shown above, is the opposite of the hammer pattern. It's a bearish signal which signifies the failure of buyers to close the market at a new high, and sellers surging back into the market, to close near the low. We can now further elaborate on our rules:
- Rule 1: Go long when the price is above the 34 EMA and hammer price action pattern is formed.
- Rule 2: Go short when the price is below the 34 EMA and shooting start price action pattern is formed.
BTC/USD price chart highlighting shooting star price patterns (the red boxes) and hammer price patterns (the green boxes) with the 34 EMA (purple line).
The chart above highlights occurrences of both rule one and rule two. In most cases, the market continued to trade in the direction of the moving average and price action pattern suggestion. There will be occasions where your chosen trading rules will be less effective, which is why risk management and using a stop loss will prove to beneficial in the long run.
One of the reasons price action trading is popular is because the price action patterns themselves give traders an opportunity to identify entry price levels and stop loss levels. For example, the entry price could be when the market breaks through the high of a hammer price pattern or the low of a shooting star price pattern. The stop loss level could then be on the other side of the price pattern with a target level of one, or two times the risk on the trade - which is the entry price minus the stop loss price.
Through the use of these price action trading patterns and CFD trading, the trader is able to trade Bitcoin long and go short Bitcoin as well, thereby giving the trader opportunities in different market conditions.
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Commodity Trading Strategies
Trading commodities such as gold, silver, and oil are popular among traders as they can often trend in a directional manner for quite some time. All markets go through different market conditions at some point. However, commodity markets are heavily impacted by supply and demand issues caused by weather patterns, geopolitical tensions and economic sentiment.
The types of strategy which tend to be suitable for commodity trading are typically swing trading strategies, seasonal trading strategies, and position trading strategies. Many traders fuse together elements of swing trading and day trading to trade in very strong trending commodity markets. This enables traders to use some of the lower timeframes, such as the four-hour chart, to identify trend following trading opportunities.
Brent Crude Oil Commodity Strategy
The MACD and RSI indicators are two popular trading indicators that help find markets that are trending, markets that are about to change direction, and overbought and oversold conditions. Here is what both of the indicators look like on a four-hour chart of Brent crude oil:
Brent crude oil four-hour price chart with MACD and RSI indicators. Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
To beginning traders, the price chart about may seem random and overwhelming. This is why strategy is so important - they can help traders streamline the process of information to aid in their decision making. So let's start with a set of rules to process what the chart is telling us:
- Rule 1: Go long when the MACD is above its zero line.
- Rule 2: Go short when the MACD is below its zero line.
Essentially, the MACD acts as a broad trend filter to give the trader a directional bias. The next step is to look for clues of overbought and oversold conditions as this could offer the best time to execute a trade. We can use the RSI (4-period setting) to do this:
- Rule 3: Go long when the RSI is below 30 (the lower black line in the RSI indicator window).
- Rule 4: Go short when the RSI is above 70 (the upper black line in the RSI indicator window).
Traders can add further rules for specific entry price levels and stop loss price levels. For example, adding additional rules to look for price action patterns such as hammer and shooting start candles could be useful. Some traders may explore using other indicators like the Average True Range (ATR) to identify price levels for a stop loss. For now, let's identify the areas where rules one to four from above have occurred:
Brent crude oil four-hour price chart with MACD and RSI indicators and trade examples.
In the price chart above, the green boxes represent occurrences where both rule one and rule three have been met; the MACD above the zero line and the RSI indicator below the 70 line. The red boxes represent occurrences where both rule two and rule four have been met; the MACD below the zero line and the RSI indicator above the 30 line.
It is important to note that these conditions are best suited for very strong trend markets, as the four-hour price chart above shows. It is well worth considering adding more rules, such as moving average alignments, to try and identify these conditions moving forward. Of course, it is inevitable to have losing trades when the market changes direction or market condition. This is why using stop losses and proper risk management techniques are important.
Index Trading Strategies
Index trading is favoured by both short-term and long-term traders due to its ability to offer strong trending conditions on the lower timeframes and higher timeframes. This is why trading indices strategies often include day trading strategies, swing trading strategies, position trading strategies, seasonal investing strategies and even hedging strategies.
As global indices attract all types of traders, trading indicators such as the RSI indicator, MACD oscillator, Stochastic oscillator, and Bollinger Bands can be quite effective in trading them in the right market conditions.
While you can trade 19 different global stock indices, short-term traders prefer to focus on the world's major indexes which include the DAX30, FTSE100, SP500, NQ100, DJI30 and JP225. This covers the major indices from Europe, Asia and the United States. Let's now focus on trading indices strategies for the DAX30 using day trading techniques.
DAX30 Index Trading Strategy
While some traders focus on day trading stocks, many choose to employ day trading techniques on stock market indexes due to low spreads and commissions. For example, Admiral Markets offers 24 hour CFD trading on the DAX30, with zero commission and tight spreads across the world's most popular trading platforms.
When learning how to day trade the DAX30 CFD index, it is important to remember that day trading itself involves taking multiple trades a day. This is important to know as a higher frequency of trades means more winners and more losers. Therefore risk management should be the cornerstone of your trading strategy. For now, we will focus on using some of the indicators and techniques we have used in previous strategies, found above.
DAX30 CFD five-minute price chart with Bollinger Bands, MACD and a 50 EMA. Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
The chart above shows a five-minute chart of the DAX30 CFD index during a specific time period. By using a variety of trading indicators, it can help the trader to identify the trend of the market as well as a way to time their trades. For example:
- Rule 1: Go long when the price is above the 50 EMA + the MACD is above the zero line + price has rejected the lower Bollinger Band line.
- Rule 2: Go short when the price is below the 50 EMA + the MACD is below the zero line + price has rejected the upper Bollinger Band line.
The chart below shows some of the occurrences of rule one and two in action:
DAX30 CFD five-minute price chart with Bollinger Bands, MACD, a 50 EMA and trade examples.
It is clear to identify the volatility of the price cycles in the beginning half of the chart. The combination of using the exponential moving average and MACD alignment helped to avoid such volatile conditions - on this occasion.
The middle part of the chart is where the price cycles start to settle, and the exponential moving average and MACD alignment help to identify three possible trading opportunities highlighted in red. While the price movement in the first red box moved from the upper Bollinger Band to the lower Bollinger Band (a useful price target when trading short), the second and third red boxes did not and broke through the upper Bollinger Band - most likely resulting in two consecutive losing trades.
At the end of the chart, price cycles start to trend higher bringing the exponential moving average and the MACD in alignment for long positions. Trading on the bounce of the lower Bollinger Band resulted in two possible trading opportunities which went on to reach the upper Bollinger Band (a useful price target when trading long).
Traders may add more rules to check the higher timeframes to identify the very best trends, as well as proper trade management and risk management techniques to maximise winning trades and minimise losing trades. One of the best ways to optimise trading strategies is to open a demo account and start trading in a risk-free environment so you can start practising and developing strategies for trading the DAX30 index. You can read more about this, below.
In fact, did you know that Admiral Markets provides professional traders with the most competitive trading terms on the DAX30 index? Yes! That's right! You can trade CFDs on the DAX30 index with zero commission, the ability to diversify your market exposure across multiple companies and industries, and so much more! Click the banner below to learn more about the DAX30 CFD today!
How to start trading and honing strategy risk-free
In this article, we have explored a wide variety of different trading strategies and trading techniques. The best way to put this theory into action is through trading in a risk-free environment so you practice your skills, optimise your strategies and learn to manage your emotions while trading.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.