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Trading Styles . . .

Trend Following

Most markets will experience prolonged directional price moves over time. These price moves are a direct result of a continuing imbalance between supply and demand. A typical trend can last from several months to several years. Trend Following trading systems do not concern themselves with the short-term ebb and flow of price action, but rather attempt to capture profits from significant price moves that typically unfold over many months to several years. Trend following trading systems are usually classified as long-term in nature.

Short-Term

Short-Term trading primarily focus on capturing profits from price moves that last several hours to price moves that last several days. Typically, a short-term trading system will not hold a position for more than three months. The majority of short-term trading systems will hold a position for several days. These trading systems attempt to predict and profit from the ebb and flow of price action for a particular market.

Intraday

Intraday trading strategies are focused on using 5-minute to 60-minute bar charts to capture price moves that take place over minutes to hours. It is not uncommon for intraday trading systems to not hold any position over night, or exit all positions by the end of the daily trading session. These trading systems are concerned with capturing profits from the shortest-term ebb and flow of market price action. Intraday price action is thought to contain the most noise, which often presents difficulties when trying to determine the direction of a market.

High Probability

High probability trading systems are designed to generate trading signals that have a very good chance of being profitable. These systems will often wait for a clearly defined price pattern to develop before initiating a position. The majority of high probability trading systems are short-term in nature, focusing on predicting what happen during the next several trading bars. High probability trading systems typically attempt to have at least 70% of their trades end up as winners, although this is not written in stone. One challenge in creating high-probability trading systems is that they can be over-optimized (or curve fit) to perform well during the testing period. This creates problems when, not if, the markets change over time.

Pattern Recognition

Pattern Recognition trading systems will analyze price action in the markets and attempt to identify chart formations that have a good track record of predicting future price moves. These systems generally attempt to predict the direction of the next several price bars, but do not concern themselves with the direction of the longer term trends. Price patterns can be researched on 60-minute bar charts, daily bar charts, weekly bar charts, and even monthly bar charts.

Momentum

Momentum trading systems are designed to take advantage of the price momentum of a market. These systems are designed to get into a strong price move with the hope that prices will have follow through in the same direction. Once the momentum of a price move slows down or falters, these trading systems are designed to exit positions quickly, thus profiting from the ebb of the market but getting out before the flow of the market.

Intermarket or Spreads

Intermarket trading systems are concerned with the relative price moves of two different markets or two different contract months. Even if both markets are heading in the same direction, intermarket strategies can be implemented to take advantage of different rates of change (by buying the market moving up faster and selling the market moving up slower). Spread strategies can be applied within the same market over two different contract months. A good example of this is the old crop contracts versus the new crop contracts in the grain markets. These spreads can be volatile and offer profit opportunities.