The complete guide to trading strategies in the UK

What is a trading strategy?

A trading strategy is a plan that uses analysis to identify specific market conditions and price levels. While fundamental analysis can be used to predict price movements, most strategies focus on specific technical indicators.

What is the difference between a trading strategy and a trading style?

Although there's a lot of confusion between 'style' and 'strategy', there are some important differences every trader should know. A trading style is an overarching plan for how often you'll trade and how long you'll keep positions open. A strategy is a very specific methodology for defining the price points at which you'll enter and exit trades.

A trading style reflects your preferences while trading, such as how frequently and how long or short-term you trade. A style can change based on how the market behaves, depending on whether you want to adapt or withdraw until conditions are favourable. For a fuller breakdown of trading styles, see our guide to trading styles.

Best trading strategies

We've looked at some of the most popular top-level strategies for UK traders, which include trend trading, range trading, breakout trading, reversal trading, gap trading, pairs trading, arbitrage and momentum trading.

Trend trading

A trend trading strategy relies on using technical analysis to identify the direction of market momentum. This is usually considered a medium-term strategy, best suited to position traders or swing traders, as each position remains open for as long as the trend continues.

The price of an asset can trend up or down. If you were going to take a long position, you'd do so when you believe the market is going to reach higher highs. If you were going to take a short position, you'd do so if you thought the market would reach lower lows.

Derivative and leveraged products such as CFDs are popular choices for trend-following strategies, because they enable traders to go both long and short. Here, you'd put up a small initial deposit (called margin) to open a larger position. Note that leveraged trading is high risk and you could lose more than your initial deposit, because your total profit or loss is based on the total position size. Make sure you have adequate risk management steps in place.

Trend traders use indicators throughout the trend to identify potential retracements, which are temporary moves against the prevailing trend. They'll often take little notice of retracements, but it's important to confirm it's a temporary move rather than a complete reversal, which is often a signal to close a trade. Some of the most popular tools in trend-following strategies include moving averages, the relative strength index (RSI) and the average directional index (ADX).

Range trading

Range trading seeks to take advantage of consolidating markets, the term used to describe a market price that remains within lines of support and resistance. Range trading is popular among very short-term traders (known as scalpers), as it focuses on short-term profit-taking, though it can be seen across all timeframes and styles.

While trend traders focus on the overall trend, range traders focus on the short-term oscillations in price. They open positions when the price is moving between two clear levels and is not breaking above or below either. This is a popular forex trading strategy, as many traders work off the idea that the very liquid currencies market remains in a tight trading range, with significant volatility in between these levels.

Range traders use indicators such as the stochastic oscillator or RSI to identify overbought and oversold signals, and tools such as the Bollinger Band or fractals indicators to identify when the market price might break from this range, indicating it's time to close the position.

Breakout trading

Breakout trading is the strategy of entering a given trend as early as possible, ready for the price to 'break out' of its range. It's commonly used by day traders and swing traders, as it takes advantage of short to medium-term market movements.

Traders who use this strategy look for price points that indicate the start of a period of volatility or a change in market sentiment. By entering at the correct level, breakout traders can ride the movement from start to finish. It's common to place a limit-entry order around the levels of support or resistance, so that any breakout executes a trade automatically. Most breakout strategies are based on volume levels, so popular indicators include the money flow index (MFI), on-balance volume and the volume-weighted moving average.

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Reversal trading

The reversal trading strategy is based on identifying when a current trend is going to change direction. Once the reversal has happened, the strategy takes on many of the characteristics of a trend trading strategy, as it can last for varying amounts of time.

A reversal can occur in both directions, as it's simply a turning point in market sentiment. A 'bullish reversal' indicates the market is at the bottom of a downtrend and will soon turn into an uptrend, while a 'bearish reversal' indicates the market is at the top of an uptrend and will likely become a downtrend.

When trading reversals, it's important to make sure the market isn't simply retracing. The Fibonacci retracement is a common tool used to confirm whether the market surpasses known retracement levels. It's worth noting that some consider Fibonacci retracements to be a self-fulfilling prophecy, as many orders congregate around these levels and push the price in the desired direction. For more on this, see our guide on harmonic patterns. It's important to combine technical indicators with other forms of analysis, whether other technical tools or fundamental analysis.

Gap trading

A gap occurs where no trading activity has taken place. This happens when an asset's price moves sharply high or low with nothing in between, implying the market has opened at a different price to its previous close.

If you're a gap trader, you're likely a day trader who watches these price gaps from a previous day and seeks opportunities between this and the opening range of trading for the next day. An opening range that rises above the previous day's close is a 'gap' that usually signifies going long, while an opening range below the previous day's close signifies an opportunity to go short.

Pairs trading

Pairs trading involves finding a correlated pair of instruments where the valuation relationship has gone out of alignment, buying the under-priced instrument and selling the overpriced one. The aim is to make a profit irrespective of market conditions such as downtrends or uptrends.

Arbitrage

Arbitrage is a transaction or series of transactions in which you generate profit with minimal risk. An example would be spotting an opportunity in two equivalent assets where one is priced higher than the other, and taking advantage by buying the lower-priced one while it's still undervalued. There are few arbitrage opportunities because many traders are also on the lookout, so they're often found and closed quickly as more traders flood the market.

Momentum trading

Momentum trading is based on price trends and the direction they're taking. This happens where there's heavy price movement (or momentum) and traders are buying and selling assets for a period of time. Once there's a price change, the momentum shifts in a different direction.

What's the best trading strategy for you?

There's no one-size-fits-all approach when it comes to trading, and no two traders' strategies will be exactly the same. The strategy that works best for you will depend on your appetite for risk, your trading style, your level of motivation and more. Always do as much research as you can before entering the live markets, and use your demo account to hone your skills.

What to know before you put your trading strategy into action

Putting your strategy into action can take time, dedication and practice. You can start with a demo account, where you can test your strategy in a risk-free environment with £10,000 in virtual funds.

You can also use the demo account as an opportunity to explore the markets and get into the daily habits of a trader. Once you're ready to take on the live markets, you'll have access to a range of platforms, including our web platform, our award-winning mobile app, and specialised platforms such as MT4, L2 Dealer and ProRealTime. You'll also have access to free trading alerts, which are automatic and customisable notifications triggered when your trading specifications are met, plus trading signals that give actionable buy and sell suggestions.

Ready to put a strategy into action? Open a demo account to practise with £10,000 in virtual funds, or open a live account to trade across 15,000+ markets. For more, explore our guides on trading styles, risk management and technical analysis.