How to choose the right trading strategy

There are many different components involved in trading, regardless of the trading style you choose.

In order to make your trades as successful as possible, you need to ensure each of these components is optimised to produce high profits and minimal risk for every trade.

One of the most important of these components, which every trader should incorporate effectively in their trading journey, is the strategy you use for each investment.

Of the millions of traders around the world, each one will likely have to adapt their trading strategies for every trade they make. As when you have ever changing financial markets, your strategies must be equally adaptable.

However, with this comes the challenge of knowing how to choose the right strategy when trading.

Therefore, this article will lead you through the many ways that you can choose the most effective strategy for each of your trades.

1. Determine your style of trading

One of the best ways to choose the right trading strategy, is to first choose the style of trading best fitted for your current investment.

There are various styles of trading, each offering their own unique processes, and it’s important you choose the right one for your trades.

For instance, one style of trading uses contracts for difference (CFDs). When trading CFDs, you’re speculating on the price movements of an asset, as opposed to owning the underlying asset itself.

This can be important for your strategy, as for example, CFDs allow you to gain a profit from a falling market, whereas traditional trading only allows profit with upward movements.

Therefore, in this case, you have a greater opportunity to strategise a profitable trade on an asset that’s losing value, since the use of CFDs has broadened your potential avenues for a trade.

If you can narrow down the best style of trading, this will contribute heavily towards the type of strategy you go for.

2. Use technical indicators

Another important method of determining the best trading strategy is to use technical indicators.

These mathematical calculations allow you to measure the performance of financial markets, giving you detailed insight into the trends, patterns, and overall directions of an asset’s value and movements across the market.

The more informed your strategy is, the more effective it will prove when you execute the trade.

Therefore, by knowing the ins and outs of the current market performance, you’ll have a more knowledgeable basis on which to choose your strategy.

Certain patterns in the market might indicate that a specific strategy will be best applied here. Hence, you should make technical analysis a prime step in your strategy planning.

3. Analyse external events

Trading strategies should be chosen in accordance with how you feel the market is set to move.

Thus, you need to pay close attention to one of the most significant factors that will affect this movement, and therefore, your preferred strategy – external events.

This is known as fundamental analysis, and can be conducted alongside technical analysis.

The financial markets can be very susceptible to influences from the outside world. This can include the current political climate of countries – wars, trading conditions, elections – as well as their economic state – cost-of-living crises, inflation rates.

If you have an effective method of monitoring how these fundamental factors impact the markets, you’ll be able to predict the coming changes of your chosen assets, and as a result, adapt your trading strategy to accommodate it.

You can use an economic calendar to achieve this, which outlines important events in the financial diary, and the likelihood of which they’ll impact the market.

For instance, if you were to identify a steady increase in inflation of the next year or two, based on the reports released from central banks, you could consider position trading on certain assets, where you suspect holding a position over a long period will produce long-term profits.

Choosing the right trading strategy can be a complicated task, but with these three key considerations in mind, you’ll be more equipped to pick the best, accurate strategies for each of your trades, and significantly increase your chances for profit.