Best trading strategies
We’ve looked at some of the most popular top-level strategies for UK traders, which include trend trading, range trading, breakout trading, reversal trading, gap trading, pairs trading, arbitrage and momentum trading.
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 position traders or swing traders, as each position remains 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.
Derivative and leveraged products such as CFDs are popular choices for trend-following strategies, because they enable traders to go both long and short. Here, you’d put up a small initial deposit (called margin) to open a larger position. Note that leveraged trading is high risk and you could lose more than your initial deposit, because your total profit or loss is based on the total position size. Make sure you have adequate risk management steps in place.
Trend traders use indicators throughout the trend to identify potential retracements, which are temporary moves against the prevailing trend. They’ll 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. Some of the most popular tools in trend-following strategies include moving averages, the relative strength index (RSI) and the average directional index (ADX).
