How can you categorize trading strategies?

1 Time Horizon

One way to classify trading strategies is by their time horizon, or how long they hold their positions. Some traders prefer to open and close their trades within the same day, or even within minutes or hours. These are called day traders or scalpers, and they use short-term technical analysis, market trends, and price action to capture small price movements. Other traders may hold their positions for several days, weeks, or months, and use longer-term technical analysis, fundamental analysis, or macroeconomic factors to identify larger price trends. These are called swing traders or position traders, and they are less concerned with the daily fluctuations of the market.

2 Trading Style

Another way to categorize trading strategies is by their trading style, or how they approach the market. Some traders are more aggressive and risk-seeking, and they use high leverage, frequent entries and exits, and tight stop-losses to maximize their profits. These are called momentum traders or breakout traders, and they look for strong price movements in one direction, often triggered by news events, technical signals, or market sentiment. Other traders are more conservative and risk-averse, and they use low leverage, fewer trades, and wider stop-losses to preserve their capital. These are called trend traders or range traders, and they look for consistent price movements within a certain direction or boundary, often supported by moving averages, trend lines, or support and resistance levels.

3 Trading System

A third way to categorize trading strategies is by their trading system, or how they generate and execute their trading signals. Some traders rely on their own analysis, intuition, and discretion to decide when and how to trade. These are called discretionary traders, and they may use a combination of technical analysis, fundamental analysis, market sentiment, and personal experience to make their trading decisions. Other traders use predefined rules, algorithms, and indicators to automate their trading process. These are called systematic traders, and they may use backtesting, optimization, or artificial intelligence to create and validate their trading systems.

4 Trading Objective

A fourth way to categorize trading strategies is by their trading objective, or what they aim to achieve with their trading. Some traders focus on generating consistent returns over time, regardless of the market conditions. These are called absolute return traders, and they may use hedging, diversification, or arbitrage techniques to reduce their exposure to market risk. Other traders focus on outperforming a certain benchmark, such as an index, a sector, or a peer group. These are called relative return traders, and they may use tracking, correlation, or alpha strategies to enhance their performance compared to their reference point.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?