There are thousands of trading strategies that traders employ every single day. But this doesn’t mean that all of these strategies are fully optimized with the assets they are paired up with. In this article, we would like to discuss 3 of the most popular strategies used by traders all over the world and which financial assets apply to them the most.
This article is purely an opinionated piece, meaning that anybody who reads it can actively disagree with it, which we most definitely encourage.
So now, without further ado, let’s start discussing the first strategy and the asset that applies to it the most.
Day trading is a very simple concept. If you open a trade and close it within the same trading hours, then you’ve just day traded. For example, imagine you live in New York. You just bought Apple shares on the New York stock exchange at 11:00 AM and sold it at 5 PM. That is what qualifies as day trading. Selling something within the same hours that a stock exchange operates.
Unfortunately, this trading activity is banned in the US for stocks, but it’s a perfect strategy for an asset like currencies. This is mostly due to how currency trades are processed, also paired up with the fact that FX markets are open 24/5.
Although forex trading in the USA is a bit harder when compared to other countries, it should be noted that other financial assets suffer the same amount of regulation as well. But the day trading strategy gives the FX market that extra edge for people living in a very connected and fast-paced society that we have today.
Currency pairs are arguably the best fit for day trading, considering the frequency at which they change exchange rates. Even a small move in the EUR/USD pair could mean thousands in potential profits for large scale traders. And those kinds of movements could happen every single day regardless of the currency. Why? Because no matter what, when one currency is depreciating, it means that the other one is appreciating relative to each other. There is always a winner in an FX trade.
Furthermore, the FX market has already designed itself around the day trading strategy in a sense. All of the features that service providers offer in this sector are dependant on people placing quick trades every single day. For example, the bonus system that the sector has. In order for traders to get their money’s worth so to say, they have to trade as often as possible with little trades, or close and open much larger ones that carry bigger risk. This is what’s usually called a trading minimum for withdrawal, and is part of the terms and conditions that most brokers have when they hand out their bonuses. But it’s not something unfair or unreasonable.
This strategy is sometimes confused with day trading as well, but that couldn’t be further from the truth. Short-term trading could last weeks, months, or even years depending on what we are comparing it with.
These trades usually occur a few days before some major news is distributed from listed companies. This could be somewhere at the beginning of a quarter when the company is preparing to disclose information about the profits generated in the previous quarter.
Or, it could be sometime in the fall as companies prepare for the consumer frenzy that is Black Friday or the Christmas shopping period.
The perfect asset for this trading strategy is a small-scale company’s stock. Why small-scale? Because during these key moments, smaller companies have much more room to grow depending on how profitable they were in the last few months. Furthermore, these small scale companies tend to be newer additions to the market, meaning that even if they underperformed, there will not be too much of a fall in their stock prices. They’re arguably the safest bet for many traders.
But don’t think that profits are 100% guaranteed with this strategy. Much like with everything else in finance, short-term trading is just as risky as anything else.
This trading strategy is the most wide-spread among all 3 we’ve listed in this article. This strategy is usually used by people trying to build their retirement plans or people who have inherited a large sum of money from their parents and want to keep it safe somewhere besides a bank.
Long-term trading is often synonymous with the 401k plan in the United States, while other countries mostly see it as a repository for their funds.
When it comes to the perfect asset for this trading strategy, we have to say its blue-chip stocks, indices, and bonds. Why these 3 assets in particular? Well, let’s take a look at them individually.
Blue-chip stocks are very large corporations that are simply too big to fail no matter how big an economic recession may be in the country. These companies are Apple, Amazon, Google, and various other household companies you’ve definitely heard of.
The main attraction is that the annual yield from these stocks is around 3-4% which is higher than the interest rates offered by banks, thus making stock investments a better option even after we bring inflation to the mix as well.
Indices are also a great option due to how they’re structured. The most popular index is the S&P 500, a combination of the United States’ 500 largest companies on the New York stock exchange. Due to having different varieties of stocks in the index, no matter how bad the economy may get in a specific year, there are always some companies that are growing while the others are shrinking. This provides some serious stability as well as stable growth if the economy is in good shape.
In fact, the S&P 500 is so important, that it’s often used as a direct measurement for the performance of the US economy. If it’s going down, well then it’s time to panic. But, if it’s going up, then everything is okay.
And finally, bonds. These assets are basically loans given to the government. The government then sets a dividend or a payment (also known as yield) they have to provide to anyone who has this bond every month or every year. It’s basically like collecting interest while you hold this bond. It can be easily sold once it has paid for itself in these interest payments, so you can imagine how long you can hold onto them.