19 September 2015

Trading in Market Cycles: Building an Agile Strategy

How does an agile trading strategy work?

​​​​​Day traders may use an agile trading strategy with the aim to maximise their gains from swift market moves without leaving themselves exposed to violent price swings and heavy losses. 

Trading strategies include scalping, trending, and ranging, or a mixture of all three (see below), but whichever strategy an investor adopts, it requires due diligence, patience, practice, and commitment.​

Before adopting a strategy, traders might consider the following:

  • Market hours – when is the market quiet and when is it busy?
  • Time of year – European summers are quieter than at other times
  • Liquidity – how much volume is traded on the market will determine how easy it may be to make and exit a trade
  • Data releases – what is the data, when is it released, and how might it impact trading patterns?

 

Scalping

Scalping means taking profits on small price changes. It requires sophisticated tools including data and a live market feed, which can be expensive. There are three different ways of scalping:

 

  • Market making – capitalising on the small spread between  the 'bid' and 'offer'
  • Purchasing in large quantities – taking profits on very small price gains
  • Purchasing on signal – then selling on the first exit signal, which requires commitment to the strategy as it means going against prevailing sentiment​​

Trending

 

Trending describes any strategy whereby the investor trades on the basis of a perceived trend; trying to profit from sustained moves in one direction.

Trending is usually most effective when markets are at their busiest, but trends can occur over long periods or in the space of a few minutes. Trending requires:

  • Mapping, charting, and spotting trends before committing to them
  • Spotting highs, lows, and support levels and deciding how far back to analyse data
  • Tracking indicators such as MACD, ADX, moving averages, and volumes
  • Knowing when a trend is and is not confirmed​​

When markets are 'risk off':

  • Investors lack confidence
  • Media is pessimistic
  • The market/economy might be in the bear/full recession phase
  • 'Safe haven' assets such as gold and the dollar thrive

Protecting your portfolio

Investors may hold risk assets in their portfolio while also taking out protection against potential losses: this is usually in the form of options. For instance, you might think a market will rise over the long term, so you buy a basket of assets to reflect this view. Short term, however, there could be some potential volatility, so you protect your position by taking out an option to sell the assets at an agreed price, which provides you with some protection in case the market suddenly falls.

Pros:

  • Diversifies portfolio
  • Spreads risk
  • Margin on options can be cheap

Cons:

  • Protection can be expensive if you take it out at the wrong time

Stop loss orders

A stop loss order is an instruction to sell an asset when it reaches a certain level below its current market price. This acts as a safeguard against heavy losses.

Pros:

  • Provides downside protection in volatile markets
  • Can be adjusted depending on how much you are willing to risk losing

Cons:

  • Needs to be manually managed
  • No control over it being triggered in a flash crash

Algorithmic trading

Algorithmic trading or automated trading takes the sentiment out of dealing and allows traders to specify sets of rules according to which a computer will buy and sell assets.

Pros:

  • Reacts faster than a human
  • Takes the emotion out trading
  • Greater consistency and discipline as it works to rules​

Cons:

  • Lack of human control
  • Risk of mechanical failure
  • Too many rules and data

 

Why trade with Saxo Capital Markets?

- Award-winning technology: choose between SaxoTrader and SaxoTraderGO 

- Active Trader price plans available, with equity commission fees from £5* and 

FX spreads from EURUSD 0.2** pips

- Ability to hold multiple currency sub accounts

- Multi-asset trading with over 30,000 assets to choose from across global markets

 

LEARN MORE  


* To qualify for the Active Trader Pricing Plan, you need to execute at least 100 trades per calendar month on Stocks, ETFs and Single Stock CFDs.

**The FX Active Trader price plans are designed for active traders who trade over 20mln notional per month.



 

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.