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Trade the Markets Like a Pro: Strategies and Tips
BY Janne Muta
|July 16, 2024Whether you want to trade the markets using stocks, currencies or commodities this article provides you with understanding with an intro to different markets and trading instruments but also teaches you with trading strategies. The article helps you to start trading the markets using commonly used strategies alternatively you can create your own strategies based on the ones introduced here.
Understanding Market Trading
Market trading encompasses a wide range of activities in various financial markets. At its core, it involves the exchange of financial instruments between buyers and sellers. These transactions take place in different types of markets, including stock markets, forex markets, commodity markets, and cryptocurrency markets. Each market operates under specific rules and has its unique characteristics.
In the stock market, traders buy and sell shares of publicly listed companies. Forex trading involves the exchange of currencies in the foreign exchange market, while commodity trading is often done using futures or CFDs that reflect the prices of physical goods such as gold, oil, and agricultural products. Cryptocurrency trading, a relatively new but rapidly growing market, deals with digital currencies like Bitcoin and Ethereum.
Key terminologies in market trading include bullish and bearish trends, which describe rising and falling market conditions, respectively. Market reversals are processes that take place when these trends grow old and the fundamental theses that created the market trends are priced in to the market. Liquidity refers to the ease with which an asset can be bought or sold without significantly affecting its price.
Exchange-traded and OTC markets
To effectively trade the markets, it is crucial to understand how they operate. Markets for standardised products like stocks, futures, and options function through exchanges that provide a platform for buyers and sellers to conduct transactions. Major stock exchanges include the New York Stock Exchange (NYSE), NASDAQ, and the London Stock Exchange (LSE), while futures and options are traded in exchanges such as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). These exchanges ensure transparency, liquidity, and regulatory oversight, facilitating fair and efficient trading.
In contrast, over-the-counter (OTC) markets (e.g. CFDs) are decentralized and involve trading directly between two parties without the supervision of an exchange. OTC markets are prevalent in forex trading and the trading of less standardised financial instruments such as certain derivatives, bonds, and commodities. Transactions in OTC markets can be customised to meet the specific needs of the parties involved, offering greater flexibility but often involving higher counterparty risk and less transparency compared to exchange-traded markets.
Forex trading occurs over-the-counter (OTC) through a network of banks, brokers, and financial institutions. Participants in the market include retail traders, who trade on their own behalf, and institutional traders, such as hedge funds, mutual funds, and investment banks. Each group has different resources, strategies, and objectives.
Market Hours
Market hours and trading sessions vary depending on the specific market. For instance, trading the markets in currencies is possible 24 hours a day, five days a week, due to the global nature of currency trading. Stock markets have specific opening and closing times, which can vary by region. Understanding these schedules is vital for planning trades and managing risk.
Trade the markets: Different Trading Styles and Strategies
Market trading can be categorised into various styles, each with its own strategies and timeframes. The main types are day trading, swing trading, position trading, and scalping.
Scalping
Scalping is a high-frequency trading strategy that involves making numerous small trades taking advantage of minor price changes. Scalpers hold positions for a few seconds to minutes, aiming to accumulate small gains that add up over time. This style to trade the markets is common but requires advanced trading tools, quick reflexes, and a deep understanding of market mechanics.
Day Trading
Day trading involves buying and selling financial instruments within the same trading day, with positions usually not held overnight. Those that trade the markets using this style requires quick decision-making and a thorough understanding of market trends.
Strategies include momentum trading, where traders capitalise on the strength of market trends, and arbitrage, which exploits price differences between markets. Note, however, it also involves significant risk and stress due to the rapid pace.
Swing Trading
Swing traders might use moving average cross overs or retracements to key support levels as trade entry signals. This type of trading involves holding positions from several days to weeks, aiming to profit from short- to medium-term market movements. Traders relying on technical analysis to trade the markets identify entry and exit points using chart patterns and indicators. Swing trading balances the rapid pace of day trading with the long-term approach of position trading, making it suitable for those who prefer a less intensive trading schedule. Note however, that this style of trading can also be risky.
The Pin Bar Strategy Explained
Several prominent figures in the trading world including Martin Pring, Steve Nison, Al Brooks and Nial Fuller have used the pin bar strategy to trade the markets. These traders have collectively shaped the pin bar strategy into a widely recognised and utilised trading tool.
The pin bar itself is characterised by a long wick (or shadow) and a small body, with the wick being at least two-thirds the length of the entire candlestick. This formation suggests a sharp reversal in market sentiment during the time frame of the candlestick. The long wick indicates that the market tested a certain price level but failed to maintain it, ultimately reversing direction.
To effectively trade the markets using the pin bar strategy, traders often look for the following:
- Context: Pin bars are more significant when they occur at key support or resistance levels. This context increases the likelihood that the reversal signalled by the pin bar will lead to a meaningful price movement.
- Trend: Pin bars that align with the prevailing trend are typically more reliable. For instance, a bullish pin bar (with a long lower wick) in an uptrend can signal a continuation of the upward movement.
- Confirmation: Many traders wait for confirmation before entering a trade. This can involve waiting for the next candlestick to close in the direction of the pin bar’s signal or using additional technical indicators to corroborate the pin bar's message.
The above Nasdaq chart shows bullish pin bars forming while the market trends higher above the SMA (15). These pin bars, which have relatively long lower wicks compared to their body size, often indicate a continuation of the upward movement, making them more reliable when aligned with the prevailing uptrend.
Trade the Markets with Bullish Pin Bars
- Market Orders secure a trade entry as soon as the order is placed in the trading platform. The trade entry price can be slightly higher than with limit orders but if the uptrend is strong the P&L impact remains negligible.
- Buy stop orders placed above the high of a newly-formed pin bar are executed automatically when the market moves above the pin bar high and through the price level defined in the buy stop order. This order type might result in a slightly higher entry price than a market order or a limit order.
- Buy limit orders placed inside the pin bar range could result in a lower trade entry price than the market orders and buy stop orders, but should a trader use them, he/she risks missing out on the upside potential the market might have.
Different Trade Exits with Bullish Pin Bars
- Reward to risk ratio-based trade exits. The trader might choose to exit his or her trades based on a certain reward to risk ratio. With this approach the trader decides beforehand how much he risks should the trade be unsuccessful and how much he allows the trade to gain relative to the maximum risk he accepts in the trade. For instance, if he risks 0.5% of his total risk capital per trade he might want to exit the winning trades as soon as the trade has gained twice the risk or 1%.
- Volatility-based trade exits. With this approach the volatility existing at the time of a trade entry defines the exit criteria for profitable trades. Volatility can be measured in many different ways but one of the most and simplest measures is Average True Range or ATR. The ATR indicator provides traders with a volatility reading for a given period depending on a lookback period chosen in the settings. For instance, the ATR value is X the trader might decide to (based on backtesting results) exit the trade on profit once the market has moved X times three or four or five. The idea is that further the market moves from an entry level the greater the probability that the market starts to mean revert e.g. due to profit taking.
- Higher timeframe resistance levels. To trade the markets effectively traders often pay close attention to key support and resistance levels in higher timeframe charts. If the market is trending higher in e.g. a 2-minute chart a key resistance level in an hourly timeframe chart could be a level that attracts profit taking. It’s also possible that some other traders short against the same level bringing more supply to the market. Therefore, traders might exit profitable long trades at a level like this to prevent the potential supply from taking away the open profit.
Inside Candle Breakout Strategy
The Inside Bar Forex Trading Strategy involves using the inside candle pattern (also known as inside bar), where a candlestick's high and low are entirely within the previous bar's range. This pattern indicates market consolidation and potential breakouts. Traders set buy orders above the high and stop-loss orders below the low of the inside bar to manage risk. The above daily timeframe USDJPY chart shows how inside bars in an uptrend can signal trend continuation. Breakout traders buy when the market breaks above the inside bar's high betting on increased demand as the short sellers have to exit their positions and buy the market together with breakout traders.
Benefits and tweaks
It has been claimed that this strategy works best on daily charts in trending markets but we have not seen statistical evidence for the claim. Therefore, traders are encouraged to do their own research and backtest the strategy using historical price data.
Some traders use breaks above or below inside candles to enter into reversal trades. For beginners though, it’s better to focus on continuation signals rather than reversals. The benefits of trading inside bar breaks in trending markets include clear entry and exit points and the clear directional bias at the time of trade entries. Discipline and consistent application of this strategy are crucial for successful execution of this strategy. By combining lower timeframe analysis with the daily timeframe trends might help traders in using tighter stops and smoothing out the equity curve.
Conclusion
Trading the markets is a complex endeavour, requiring a solid understanding of various financial instruments, market dynamics, and trading strategies. It can be rewarding / profitable but there are also high risks to your capital. So please trade carefully! This article has explored the fundamental aspects of market trading, highlighting the roles of stock, forex, commodity, and cryptocurrency markets, as well as key concepts such as bullish and bearish trends, liquidity, and market reversals. It also delineates the differences between exchange-traded and over-the-counter markets, illustrating the unique characteristics and risks associated with each.
Different styles and strategies, from scalping and day trading to swing trading and position trading, are used to trade the markets by pros and new traders alike. Each style necessitates a specific set of skills, tools, and risk management techniques, catering to different trader preferences and time commitments. The pin bar strategy, as championed by experts like Martin Pring, Steve Nison, Al Brooks, and Nial Fuller, exemplifies a practical approach to technical analysis, leveraging candlestick patterns to identify potential market reversals and trend continuations.
Effective trading hinges on the ability to analyse market conditions, employ suitable strategies, and manage risk meticulously. By integrating insights from various trading methodologies and understanding the psychological underpinnings of market movements, traders can navigate the complexities of the financial markets with greater confidence. Continuous learning, disciplined execution, and adaptability are essential traits for success in trading. With the knowledge and strategies outlined in this article, traders are better equipped to make informed decisions, maximise profitability, and mitigate risks, ultimately leading to more consistent and sustainable trading outcomes. Open a trading account with TIOmarkets.uk by visiting our account registration page now. Take the first step towards your trading success today.
While research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.
TIO Markets UK Limited is a company registered in England and Wales under company number 06592025 and is authorised and regulated by the Financial Conduct Authority FRN: 488900
Risk warning: CFDs and Spreadbets are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs and Spreadbets with this provider. You should consider whether you understand how CFDs and Spreadbets work and whether you can afford to take the high risk of losing your money
DISCLAIMER: TIO Markets offers an exclusively execution-only service. The views expressed are for information purposes only. None of the content provided constitutes any form of investment advice. The comments are made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances, or needs. The content has not been prepared in accordance with any legal requirements for financial analysis and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval.
Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.
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