Trading Techniques - Essay Example

Trading Techniques Contents Contents 2 Trading Techniques 3 References 5 Trading Techniques The trading techniques in financial markets are explainedas the plan for attaining maximum return through purchase or sale of stocks and securities by taking long or short positions in the market. The trading of shares and stocks are done either manually or in an automated fashion. The manual trading requires higher level of skills and trading proficiency for generating higher return from the trade. The various trading techniques that are adopted in the financial markets include the day-trading, swing trading and the trend trading techniques (ALEXANDER, 1961, p.25).The day-trading technique involves the strategy of taking a position in the market so that the return against the trading could be optimised at the end of the day.

In this technique, the day trader focuses on the movement of the share price throughout the day. The positions taken in the day-trading technique is only for a few seconds or minutes. The trading of shares and the returns and risks related to the trading of the share are realized at the end of the day. The position of share trading is not carried over to the next day (FAMA, 1970, p.385). Thus in the day-trading technique, the trader could determine the net position of profit and loss on a daily basis.

The swing trading technique requires the trader to identify the trends of the share price movements of the stocks. The swing in the share prices over a particular range could be identified to be favourable by the trader in which the trader desires to maximize the returns of the stock with the swing of the increasing share prices (JEGADEESH and TITMAN, 1993, p.68). The technique of swing trading is not a speedy process of trading as the trader holds the stock positions for days and weeks as per the analysis of the swing movement of the share prices.

The effective implementation of swing trading techniques helps in the growth of equity base. There are various types of swing trades. The swinging stock price may depict up swings which reflect increasing prices of stocks, down swing which reflect declining prices of stock, short swing movements and the long swing movements. The position of the stocks is held by the trader based on the anticipation of the swing movement of the share prices (LO and MACKINLEY, 1988, p.48).The trend trading is another technique where the trader determines the movement of the share prices in the long run.

The trend trading techniques is a simple technique of optimizing the returns from the ongoing fluctuation trend of the share prices and anticipation of how far the trend will persist. The trader makes huge sum of money by taking positions in the market when trend is favourable and then exiting the position before the trend dies out. The trading techniques are very crucial for expanding the equity base as the right trading technique and appropriate strategy helps to maximize the return on the share prices.

The trading techniques if not applied judiciously may also result in huge losses for the trader as well as the investor.ReferencesALEXANDER, S. 1961. Price Movements in Speculative Markets: Trends or Random Walk. Industrial Management Review. 2(1), pp.7-26.FAMA, E. 1970. Efficient Capital Markets: A review of Theory and Empirical Work. Journalof Finance. 25(1), pp.383-417.JEGADEESH, N. and TITMAN, S. 1993. Return to buying winners and selling losers: Implications for stock market efficiency. Journal of Finance. 1(1), pp.65-91.LO, A. and MACKINLEY, A. C. 1988.

Stock market prices do not follow random walks: Evidence from a simple specification test. Review of Financial Studies. 1(1), pp.41-66.