Trend Trading
A trend trading strategy relies on using technical analysis to identify the direction of market momentum. This is usually considered a medium-term strategy, best suited to the trading styles of position traders or swing traders, as each position will remain open for as long as the trend continues.
The price of an asset can trend up or down. If you were going to take a long position, you’d do so when you believe the market is going to reach higher highs. If you were going to take a short position, you’d do so if you thought the market would reach lower lows.
Trend traders will use indicators throughout the trend to identify potential retracements, which are temporary moves against the prevailing trend. Trend traders will often take little notice of retracements, but it’s important to confirm it’s a temporary move rather than a complete reversal — which is often a signal to close a trade.
Range trading
Range trading is a strategy that seeks to take advantage of consolidating markets — the term to describe a market price that remains within lines of support and resistance. Range trading is popular among very short-term traders (known as scalpers), as it focusses on short-term profit taking, however it can be seen across all timeframes and styles.
While trend traders focus on the overall trend, range traders will focus on the short-term oscillations in price. They will open long positions when the price is moving between two clear levels and is not breaking above or below either.
This is a popular forex trading strategy, as many traders work off the idea that the very liquid currencies market remains in a tight trading range, with significant volatility in between these levels. This means that short-term traders can seek to take advantage of these fluctuations between known support and resistance levels.
There are a range of other indicators that range traders will use, such as the stochastic oscillator or RSI, which identify overbought and oversold signals. Range traders will also use tools, such as the Bollinger band or fractals indicators, to identify when the market price might break from this range — indicating it is time to close the position.
Breakout trading
Breakout trading is the strategy of entering a given trend as early as possible, ready for the price to ‘break out’ of its range. Breakout trading is commonly used by day traders and swing traders, as it takes advantage of short to medium-term market movements.
Traders who use this strategy will look for price points that indicate the start of a period of volatility or a change in market sentiment — by entering the market at the correct level, these breakout traders can ride the movement from start to finish. It is common to place a limit-entry order around the levels of support or resistance, so that any breakout executes a trade automatically.
Most breakout trading strategies are based on volume levels, as the theory assumes that when volume levels start to increase, there will soon be a breakout from a support or resistance level. As such, popular indicators include the money flow index (MFI), on-balance volume and the volume-weighted moving average.
Reversal trading
The reversal trading strategy is based on identifying when a current trend is going to change direction. Once the reversal has happened, the strategy will take on a lot of the characteristics of a trend trading strategy — as it can last for varying amounts of time.
A reversal can occur in both directions, as it is simply a turning point in market sentiment. A ‘bullish reversal’ indicates that the market is at the bottom of a downtrend and will soon turn into an uptrend. While a ‘bearish reversal’ indicates that the market is at the top of an uptrend and will likely become a downtrend.
When trading reversals, it is important to make sure that the market is not simply retracing. The Fibonacci retracement is a common tool, used to confirm whether the market surpasses known retracement levels. It is worth noting that some consider Fibonacci retracements to be a self-fulfilling prophecy, as many orders will congregate around these levels and push the price in the desired direction.
It is important to combine technical indicators with other forms of analysis, whether this is other technical tools or fundamental analysis.