Scalping, Swing and Long-Term Trading Strategies: A Complete Guide

tradiThere are many different trading styles, and some of them will fit your trading personality. Each trading style, whether long-term or short-term, will allow you to generate gains if you combine it with a robust risk management strategy. Prior to developing a trading strategy, you should determine if you want to be very active or more passive. Are you comfortable holding positions overnight, or do you want to enter and exit during the course of a trading session? Would you prefer trading the popular currencies such as EUR/USD, GBP/USD or AUD/USD or perhaps the more exotic pairs, volatile and less liquid such as USD/TRY or USD/CNY? You should also ask yourself whether you are a value investor or like trading momentum. These questions will help guide you toward developing a trading strategy that matches your trading personality.

Your Trading Personality

Everyone has a trading personality. This is not solely determined by your willingness to accept the risk. Your trading personality stems from your desire to initiate risk and hold that risk. Some people need to be right at once, while others are content letting the markets take their natural path to their desired level.

Your trading personality also incorporates your ideas on investing. Are you the kind of person who is looking for value? Are you willing to catch the market and buy when others are selling or do you like the idea of jumping on a trend and getting off as soon as it accelerates? These concepts will help you determine if you are looking to trade a short-term or a long-term strategy. Remember, if you don’t have the time to watch the markets actively during the day, then a short-term strategy will likely be the wrong fit.

Types of Trading Strategies

There are several strategies that you can use based on your trading personality. If you like long-term trading strategies, you might consider the trend-following strategy. If you are more interested in short-term trading strategies, you can consider scalping or swing trading.

Long-Term Strategies

There are a couple of long-term trading strategies that are great for traders who are not looking for instant gratification. Two of the most popular are trend-following and contrarian trading strategies.

Trend Following

A trend-following strategy is one where you attempt to capture a trend where the exchange rate of a currency pair moves in the same direction for an extended period. One of the most efficient trading indicators that you can use to identify a trend is the Moving Average Crossover trading strategy. A moving average crossover uses two different moving averages to identify a change in the direction of a trend.

A moving average is used to smoothen the change in price action. A moving average is calculated by determining the average over a specific period. For example, the 20-day moving average is the average for the last 20-days. On day 21, the first exchange rate in the period is a drop, and a new average is calculated.

The moving average crossover strategy targets a time when a shorter-term moving average (such as the 20-day moving average) crosses above or below a longer-term moving average (such as the 50-day moving average). The red arrows on the USD/JPY chart shows crossover sell signals, while the green arrows show crossover buy signals. These crossovers represent periods in the middle of the trend. It is important to find a broker that provides low spreads with fast execution, such as Admiral Markets. There will be times when the market is in consolidation, meaning there is no visible trend, but you still receive a signal. The goal in trend following is to generate as much as you can knowing that markets only trend 30% of the time. Many traders use the opposite crossover to exit a position. For example, you enter a short position at the red arrow and stop and reverse at the green arrow. Alternatively, you can add a trailing stop or a specific risk vs. reward ratio to your risk management.

Swing Trading

The parabolic stop and reverse (SAR) is a swing trading system that is both time and price based and refers to a price-and-time-based trading system. The system was introduced by J. Wells Wilder. The parabolic SAR trails the price as the trend extends over time. This system always has you in a position that is reversed when you reach a signal. The indicator is below prices when they are rising and above prices when they are falling. The calculation of the parabolic SAR is based on the distribution of price and geared to catch a swing or trend in the market. You follow the trend until you receive the opposite signal. For example, you short the USD/JPY at the red arrows and reverse and buy at the green arrows.

You can use the stop and reverse methodology for weekly data to make it longer-term, but most traders use daily or intra-day data, which means you have to watch the markets and be ready to stop and reverse.

If you are looking for a very short-term trading system, you might consider scalping the markets. This is a term that describes quick entries and exits with well-defined risk vs. reward parameters. You might consider using an indicator, such as the Fast Stochastic on intra-day data. This will provide you with short-term signals to scalp the market.

The Fast Stochastic measures the rate accelerating in the exchange. When it moves too fast, the Fast Stochastic will rise above the 80-oversold trigger level. When the exchange rate declines too fast, the Fast Stochastic drops below 20. If you are able to place tight risk-reward parameters and buy when the Fast Stochastic drops below 20, you can also sell when the fast stochastic rises above 80. The Fast Stochastic also generates a crossover buy and sell signal. which can be added to your trading strategy to confirm your signal.

Summary

Whether you are trading a strategy that catches a trend or want to scalp the market for quick gains, you want to make sure that the strategy you chose matches your trading personality. Obviously, you must find a reliable broker to provide you with a good trading platform that allows you to operate a wide range of trading strategies. Admiral Markets is one of them. The company not only provides you with the cutting-edge trading platforms but also is a regulated broker that offers you a package of advanced Volatility Protection Settings and Risk Management. If you are trying to scalp the market, make sure you have time during the day to dedicate to your strategy. If you are more comfortable taking a long-term view, the trend-following strategy might be the best course of action.

This material is considered a marketing communication and does not contain, and should not be construed as containing, investment advice or an investment recommendation or, an offer of or solicitation for any transactions in financial instruments. The presented trading analyses refer to past performance which may change over time.