Going alt: top 5 alternative trading strategies
09:26, 10 September 2018
We all think we know how trading works – you pick a company that you think will be the next superstar, invest in some stocks and then wait until your investment comes to fruition.
Sounds like a full proof plan, right? Well, not exactly. For that to work the company you're investing in needs to be successful, otherwise you risk losing all your capital.
This type of traditional trading brings with a set of challenges, such as being accurate at predicting the next big thing, coming up with enough capital for the initial investment and of course, having the risk appetite to follow through with that investment.
That’s not to say it’s not worth it. Many traders find this trading style suits them to a tee, and it can be effective, but it’s not for everyone. What if there was another way to trade, such as an alternative trading system?
Luckily, there are several to choose from. Below we’ll assess some of the most popular ways people today are trading and discover alternative trading methods.
Note: The following alternative trading strategies can be implemented using contract for difference (CFD) trading platforms. CFD trading platforms allow you to maximise your trading potential by going long or short on a variety of financial instruments depending on whether you believe the value of the instrument will rise or fall.
Positives:
- Flexibility of instrument choice – cryptocurrencies, commodities, indices, shares and more
- Trading on leverage allows traders to multiply profit
- Accessible to almost all levels of trader
- Strictly regulated
Negatives:
- CFDs are complex financial instruments
- Trading on leverage – risk is multiplied by the level of leverage. Loss may be higher.
To learn more about alternative trading with CFDs, see our CFD trading overview.
Top 5 alternative trading strategies
1. Trade the news
This alternative trading strategy is not simply limited to the ‘news’, but encompasses all financial releases, reports or other latest events that may impact prices. Is Apple holding a press conference for a new product release? Its stock price might just rise. Or perhaps the European Central Bank is about to release its latest interest rates; a good time to watch the euro.
Benefits: Prices often react to the latest market news.
Downside: It’s not always as expected. It’s not unheard of for companies to report positive results only for its stock to fall.
2. Holding overnight – warning! You may incur overnight fees.
Typically day traders don’t hold their trades overnight. But, if you think there’ll be some big movements overnight or have another good reason to hold it open, then it may be an effective alternative trading strategy to profit with outside of usual trading hours.
Benefits: Traders can benefit from overnight/market opening price movements.
Downside: Traders will incur overnight fees and the level of leverage may change.
3. Trading what you know
There’s a lot to be said for expertise, so if you’re a pro in the tech industry, for example, and know which trends or companies are sure to be hits, then trading what you know may be the way to go. For this alternative trading strategy to work, you need to have both a good knowledge of the product/company and overall market it operates in.
Benefits: You’re the expert in this industry so you’re trading with knowledge.
Downside: Your trades may become too focused, lacking diversity, and if the industry itself fails so will your trades.
4. Diversifying your portfolio
Don’t put all your eggs in one basket. We’ve heard this saying time and time again. This type ofalternative trading,with a diversified portfolio, can mean investing in a variety of different asset groups (share, indices, currencies), different countries (Italian shares, American shares etc.), or a variety of instruments within a particular group (e.g. tech stocks, traditional businesses, etc.). The aim of this strategy is to lower the risk of losing your entire investment, by trading across a variety of instruments so if one trade doesn’t go to plan, others don’t go down with it.
Benefits: Diversification lowers the overall risk of financial loss as it is spread across a variety of markets.
Downside: Portfolios can become over diversified lowering the effectiveness of trades.
5. Employing trading psychology
Trading biases such as the hot hand bias and the overconfidence bias can affect the success of your trades. With knowledge of these biases, traders can reduce the risk of falling victim to them, and employ positive trading psychology in their trades to decrease their risk of losses.
Modern CFD trading platforms can use AI technology to help traders, such as our SmartFeed, which analyses traders’ in-app behaviour and provides helpful educational content to target biases.
Benefits: Awareness helps reduce the risk of trading biases and increases the chances for successful trades.
Downside: To err is human, unfortunately there’s no full-proof way to be 100% free from negative trading psychology.
Bonus strategy – Trading with the market and against it
Watching market trends is one alternative trading method to predict which way the market is likely to move. A continuing uptrend may indicate that the market will continue to move upwards, so it’s to time to go long. See a downtrend? Then the opposite applies, it’s time to go short. Often market trends continue for a while so it can be a good idea to follow the trend and go with the market in order to profit.
Alternatively, we’ve all heard the tales of those who invested against the market just as the trend broke – tulip mania, DotCom boom, 2008 financial crisis or more recently the Bitcoin drop of December 2017. Those who, against all odds, invested against the trend managed to profit handsomely from losses. Which is why, in times of market bubbles, trading against the trend may be the way to go.
Benefits: Whether trading with or against the trend, the main strategy here is to keep a careful watch on the markets and make your trading decisions based on facts not speculation.
Downside: While trading with the market is usually a safe bet, trading against is often a more risky and expensive strategy, as you’ll need to hold that position until the market falls. Both carry with them the usual risks of trading, and it’s all about predicting if and when a trend will turn.
Mind your risk
When using these alternative trading methods, it’s important to remember that with trading there are no guarantees. All trading carries a risk of loss alongside the possibility for profit, so when deciding which alternative trading strategy you would like to employ, always remember to calculate your risk.
To learn more on trading strategies watch our first video from "Easy-to-follow trading strategy" series.