5 Trading Strategies Every Trader Should Know

A trend in the market refers to the overall direction of prices. If prices are making higher highs and higher lows, it is deemed to be in an uptrend; and when it is making lower highs and lower lows, it is deemed to be in a downtrend.

A trend-following strategy seeks to trade with the general flow of the market. After all, there is the mantra ‘The trend is your friend.’

In essence, you want to swim in the direction of the tide, which is essentially the path of least resistance.

One of the best trend-following strategies is trading with moving averages.

Moving averages are one of the most potent technical analysis tools. They have stood the test of time because of their simplicity and versatility. Computed as the average prices of an asset over time, moving averages can help traders identify a prevailing trend and momentum, as well as confirm when the trend reverses.

Trend direction will simply be identified by the direction of the moving average. If a moving average is rising, then it means that prices are in an uptrend. The strength of a trend is determined by the slope of the moving average. The steeper the slope, the stronger the trend, and vice versa.

When trend following with moving averages, traders use the indicator’s line as a dynamic line of support and resistance. They provide a good opportunity for traders to join a trend when it has retraced. For instance, in an uptrend, traders can wait to place a buy order when the price has retraced to the moving average line.

Traders can also use multiple moving averages to confirm when a trend reversal has occurred. Shorter period moving averages respond faster to price movements than longer period ones.

Traders watch for moving average crosses to confirm potential trend reversals. For instance, consider that you are using a 21-period MA and a 55-period MA. If prices are trending higher but the 21-period MA crosses the 55-period MA downwards, it may be a confirmation signal that a downtrend is now in place.

Markets do not trend all of the time. When they are not trending, they are contained within a range that has defined support and resistance zones. In fact, markets are range-bound most of the time, and it is vital to have a strategy to capitalize on opportunities in such situations.

The idea in a ranging market is to buy at support areas and sell at resistance areas. One of the best strategies for range-bound plays is using the Pivot Points indicator.

The standard Pivot Points indicator generates 7 horizontal lines that act as reference support and resistance areas. There is a middle reference line (PP), 3 support lines (S1, S2, and S3), as well as 3 resistance lines (R1, R2, and R3).

In a ranging market, the lines will provide optimal price reference areas where traders can place buy/sell orders, as well as stop loss and take profit orders.

For instance, if the price is contained between S1 and R1, traders can seek to place buy orders near/at S1, with take profit at R1.

The stop loss can be placed below S1 or S2. Similarly, sell orders will be placed near/at R1, with take profit at S1. The stop loss can be placed above R1 or R2.

Markets are never contained in a range forever. They eventually ‘break out’ and can strongly embrace new trends. When existing support and resistance areas have been breached, it could be the start of a new trend or the continuation of a previous one.

The lucrative opportunity to ride a new trend from its very onset is why a breakout strategy is essential for any trader.  One of the most effective strategies for traders to anticipate and trade breakouts is the use of Bollinger Bands.

Bollinger Bands Breakout Strategy

Bollinger Bands is a volatility indicator that was designed to contain prices between its upper and lower bands. Traders watch out for the Bollinger Band Squeeze when timing breakouts.

A squeeze happens when the bands converge, thus ‘squeezing’ the price. It implies low volatility in the market.

Breakouts happen during periods of high volatility, and this will be denoted by the divergence of the upper and lower bands.

While the Bollinger Bands Squeeze does not provide breakout directional cues, a bullish breakout will occur when the upper band is breached, whereas a bearish breakout will happen when the lower band is breached.

There is always the risk of false breakouts, and traders can combine different indicators such as Volumes to confirm valid support/resistance breaches. The ideal point to place a stop loss is above or below the opposite breakout band. For instance, if there is a bearish breakout, you can place a stop loss above the upper band during the squeeze.

This is an event-trading strategy that seeks to take advantage of the opportunities that arise when high-impact new releases trigger significant price changes in the market. There is a fortune of news/data released every day around the world that can have an impact on the prices of relevant financial assets. No matter your trading strategy, incorporating a news trading strategy can help you avoid unnecessary risk exposure in the markets or take advantage of quick and lucrative opportunities. News releases trigger some of the biggest price movements in the market in any trading session. It is therefore important to keep track of the release of scheduled events using the Economic Calendar tool. Not every piece of news or event is worth trading. In the forex market, it is worth tracking high-impact data such as inflation numbers, interest rates, employment data, and central bank announcements. When trading the news, you can choose to place your positions before, during, or after the event. Each has its advantages and disadvantages.

Price action trading is the art of reading price behavior in the markets. At any given time, the price of an asset reflects the consensus of the market participants.

The most important indicators for a price action trader are price and time. This is why a chart is the most important tool for a price action trader (even the only one). Charts plot asset prices over time, and knowing how to read them is key to successful price action trading.

Candlestick charts are the most popular on most platforms today. Each candle contains price information such as high, low, open, and closing prices of an asset within a specified time period.

Knowing how to read single candles and even multiple candlestick patterns can help traders identify important price opportunities in the market. Some of the best single candlestick patterns include:

• Hammer
• Doji
• Hanging Man
• Spinning top
• And more…

Examples of multiple candlestick patterns include:

• Head and Shoulders
• Double Tops / Double Bottoms
• Bullish / Bearish engulfing patterns
• Evening Star
• Plus, many more…

Price action traders can also use other chart types to read price action, such as:

• Line charts
• Heikin Ashi charts
• Renko charts.