Proven trading strategies that bear the test of time

Last Updated: 20/03/2021

There are as many trading strategies as there are traders. When you consider all the technical indicators already out there, and new and innovative indicators being developed every day, there are unlimited possibilities when it comes to developing a trading strategy. A trading strategy can be as simple as the direction of the next bar dictating the position a trader takes, or a strategy that analysis multiple data streams across multiple time frames using very complex multi-variable differential equations, and everything in between.

Whatever methods and/or techniques a strategy utilizes, the approach it takes to generating trade signals will categorize the strategy into a specific type. There are three categories of trading strategies that are commonly used by successful traders.

The Trend is Your Friend

The first trading strategy is known as the trend following strategy. The objective of a trend following strategy is to capture sustained price movements when an asset begins a long-term trend. The key is to enter the position early in the in the trend by utilizing a trend-following indicator. Below is a daily chart of the S&P 500 with a standard moving-average trend following trading strategy applied to it. Other types of trend following indicators can be applied to this strategy.

Chart #1: S&P 500 Mini Daily

Over time this strategy works well for market that are prone to have sustained trends in either direction. The duration of a trend will be relative to the time-frame of the chart that the strategy is being applied to. For example, the chart above shows an uptrend that begins in September 2017 and continues until the end of January 2018. If this same asset was displayed on a monthly chart the 5-month trend displayed above would be a 5-bar “blip” and may not warrant a trade entry. However, the same 5-bars may, or may not be part of a larger trend. An analysis of different time frames needs to be done to determine which time frame is most appropriate for the strategy.

Factors that must be considered are the range and duration of the trends, and the periods when the asset is not trending. This is very important due to the fact that when the asset is not trending, the indicator that is used will more than likely give false signals resulting in a string of losing trades until a trend begins again. This is the disadvantage of this strategy. When the asset is not trending, the strategy will have to endure a period of draw-down. Chart #1 above shows these periods in the blue rectangles. They are then followed by a strong uptrend that yields enough profitable trades to offset the draw downs. This is usually the case for this type of strategy over time. The strategy is longer-term in nature and necessitates larger capital requirements to endure the draw-down periods.

Buy Low, Sell High

The full title of this type of strategy is “Buy Low at Support, Sell High at Resistance.” The idea behind this type of strategy is to determine areas of strong support from which to take long positions, and strong areas of resistance from which to take short positions. This type of strategy is better suited for smaller time frames so that price action can more easily be seen as it approaches and departs from key areas of support or resistance. Smaller time frames are also better for determining new levels of support and resistance once they have been breached. Below is a 60-minute chart of the British Pound GBPUSD with a typical range trading strategy using a price oscillator to generate trade signals.

Chart #2: GBPUSD 60-Minute

The strategy above seeks out points of overbought and oversold markets, and reverses position. This type of strategy has a higher percentage of profitable trades, but profits on each trade are smaller. This strategy is better suited for markets that have a consistent “ebb and flow” in both directions. The forex market exhibits this type of market action being that the underlying fundamentals are base on the underlying metrics of the economy of the currency. Consequently, a currency does not trend consistently in one direction. There is plenty of educational resources available at the top forex brokers to support this.

Long and Short Term Market Alignment

A third type of trading strategy that generates consistent profits when implemented correctly is a strategy that combines different times frames with different types of indicators. The idea is to use price charts with larger time frames (i.e. daily, weekly, or monthly) to determine how the market is currently trading by applying specific technical analysis indicators to distinguish a trending market from a market that is trading sideways within a range. This is better determined on the larger time frames.

Once the “mode” of the prevailing market is determined, then utilize a smaller time frame to generate trading signals with technical indicators that are best suited for the way the market is currently trading (hence the term market alignment). For example, if a moving average indicator on a daily chart is showing a strong trend to the upside, trading from the long side only using an indicator that takes long positions on price dips on an optimal intra-day time frame (i.e. 15, 20, or 60 minute) should generate consistent profit while the market remains in the uptrend. When market conditions change in the larger time frame, say for example to a range bound market, then the smaller time frame switches to a range trading indicator to generate trade signals that are appropriate to the new market conditions. This type of strategy is a bit more complex and requires more advanced trading skills and knowledge.

Trading Strategies that bears the Test of Time

Most advanced trading platforms now offer some sort of back-testing capabilities. Back-testing is the process of testing a trading strategy, via computer, using relevant historical data to simulate the trading of a strategy over a given time period. A trader can analyze the results for profitability and risk. If the results are acceptable the strategy can then be implemented with confidence that it will result in profits. In this way a trader knows if a strategy can “bear the test of time” without having to actually take the time, or the loss of capital.

See the ‘Best of’ section to see the supporting information around superior trading platforms and the leading online brokers to support your trading strategies. If you are relatively new to trading, it’s worth looking for a brokers for beginners article, as certain brokerages deliver a higher level of educational resources and a fee structure that supports a ramp up period.