Short Term Strategies That Work

The process to decide to get an investment or trading position is perhaps the most demanding process for both, professionals and retail traders and investors.

Long-term investments require the right choice of fundamental principles and variables that determine the long-term value of the investments and then to be established the optimal investment strategies so that these strategies are consistent with these principles and variables for a long time.

For short-term trading, the requirements are different. Specific rules are required, which constitute different trading strategies that must be effective in specific scenarios.

A logical approach and simple rules constitute those strategies that traders engage with since they understand them and therefore trust them in the long run.

While no trading strategy is 100% successful, traders when they have a simple scenario in their minds and follow the rules based on a logical approach, feel confident, because in this case, they know what to expect and how to act at any step during a trade. This is of great importance as they avoid mistakes while significantly increase the returns of trading in the long run.

Trading rules must be simple enough so that traders can understand them. Consider as an example the following trading strategy that will be analyzed in this article, where scenarios are based on a logical approach while simple rules are followed:

 

Scenarios for Long Position

• Stage 1.The price of a financial product (Commodity, Forex, Equity, Bond, Derivatives, CFD, etc.) should fall to the lowest level of the last eight periods (the period may be: Weekly, Daily, Two Hours, Hourly, 30 minutes, 5 minutes etc.)

• Stage 2. In stage 2 the financial product must be traded at a higher price than the highest price of the financial product at Stage 1

• Stage 3. In stage 3 the price of the financial product, between one and four periods after stage 2, must move below the lowest level of the price of the financial product in stage 2 which may be a new low.

• Stage 4. When the above conditions are met, we buy, take a long position when the price of the financial product goes one tick above the highest price of the financial product that was in Stage 2. The breakout must occur within four trading periods after stage 3.

• Stop loss. Stop-loss orders should be placed one tick below the price of the financial product at Stage 2.

This strategy is applied in multiple cases while the strategy yields significant returns, as shown in the following examples:

 

Scenarios for Short Position

The same strategy can be applied to a short position when the rules are reversed as follows:

• Stage 1. The price of a financial product (Commodity, Forex, Equity, Bond, Derivatives, CFD, etc.) should reach to the highest level of the last eight periods (the period may be: Weekly, Daily, Two Hours, Hourly, 30 minutes, 5 minutes etc.)

• Stage 2. In stage 2 the financial product must be traded at a lower price than the lowest price of the financial product at Stage 1

• Stage 3. In stage 3 the price of the financial product, between one and four periods after stage 2, must move above the highest level of the price of the financial product in stage 2 which may be a new high.

• Stage 4. When the above conditions are met, we sell, take a short position when the price of the financial product goes one tick below the lowest price of the financial product that was in Stage 2. The breakout must occur within four trading periods after stage 3.

• Stop loss. Stop-loss orders should be placed one tick above the price of the financial product at Stage 2.

All these examples, although they look slightly different, at their core are based on a logical approach by following the same rules. The logical approach behind the rules of the strategy described aboveis reasonable and straightforward: although at the beginning the price of a financial product falls to the lowest level (or reaches the highest level) in specific periods (in this strategy 8 periods), if, after that, the price follows the pattern established in the stages of the above strategy, then there is a strong indication that the price of the financial product will follow the opposite direction that it seemed at the beginning.

Trading Strategies must be valid and implemented. Valid means that trading strategies generate positive returns, while implementation requires the appropriate tools to apply a strategy.

In the era of Fintech, backtesting systems can prove the validity of trading strategies, while implementing them is possible through online trading platforms. Therefore, retail traders can apply trading strategies, such as the strategies described above, as they can be provided with the tools to implement strategies based on rules under different scenarios.

This is a major innovation that can bring retail traders to the top level of trading, as by following trading strategies that can be introduced and applied to trading platforms, trading of financial products become effective and sustainable for them.