To become a winning prop firm trader, you need a strategy that will allow you to make profits in the long run. The difference between a winning prop trader and the rest is that they have a winning strategy that they stick to.
Depending on the type of trader you are, you can decide on one strategy that will guide you in entering and exiting positions. This article will explore some of the trading strategies winning prop traders use.
REVERSAL TRADING
Reversal trading involves catching shifts in sentiment in the market. Usually, a trend reversal comes at the end of a strong move. For instance, if the price is in a solid downtrend, a reversal might come at the bottom of this downtrend.
However, catching reversals is not an easy thing to do because there is a high chance the prevailing trend will continue. As a result, experienced traders look for patterns and signals that show a looming reversal. This can include candlestick and reversal patterns like the head and shoulders.
Moreover, traders can use indicators that show weakness in the prevailing trend and a likely reversal. One such indicator is the RSI.
Reversal trading
In the chart above, Nvidia’s stock was in a downtrend, keeping below the 30-SMA. However, price action showed some weakness at the bottom of the chart. The price started sticking to the SMA. At the same time, the RSI made a bullish divergence, indicating weakness in the downtrend. This was a clear signal that the trend could soon reverse.
A trader using this strategy would wait for the price to confirm this by breaking above the SMA. This creates a good buy entry. Set a stop loss below the previous low with appropriate targets.
PULLBACK TRADING
Pullback traders look for developed trends that can offer entry opportunities during pauses. During a trend, the price moves with pauses and pullbacks. These create great areas to enter and catch a continuation of the trend.
To catch pullbacks, traders can use indicators like the moving average. This smooths out price action to show trends. Moreover, it acts as a support and resistance when the price pulls back during a trend. Other traders can use trendlines and chart patterns to catch pullback entries.
Pullback trading
In the chart above, Nvidia’s stock is in a strong downtrend below the 30-SMA. Pullback traders wait to see a clear trend like the one above. Once the price retreats and reaches the 30-SMA resistance, it creates a great selling opportunity. Some traders wait for a reversal candlestick pattern to enter. Meanwhile, others might wait for the price to break below the previous low to confirm a continuation of the previous downtrend.
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RANGE TRADING
Another winning prop strategy is range trading. Range trading involves finding entry opportunities in the oscillations in a range. The main skill required here is identifying ranging markets. Using support and resistance lines, you can identify where the price is consolidating and wait for the best entry opportunity.
A developed range should touch the support and resistance line at least twice. Therefore, the third touch creates the best entry opportunity. Some traders place entries every time the price touches the support or the resistance level. Meanwhile, some traders only trade in the direction of the previous trend.
Range trading
The chart above shows that the price was bullish before it paused and started ranging. The rectangle clearly shows the support and resistance of this range. The third touch of the range support creates a great buy signal. Range traders hold this position to the resistance level.
TREND FOLLOWING
Trend traders look for strong moves in the market that could continue. Once you identify a good trend that has just begun, wait for a nice pullback to enter the market and hold your position until the trend reverses.
To identify strong trends, you can use different indicators and tools that show the momentum and direction of the market. For instance, the RSI shows overbought and oversold conditions. When the price gets overbought, it is a sign that bulls have much power. Therefore, if the price is trending, it could go on for long. Meanwhile, the moving average shows whether the price is trending or ranging.
Trend trading
Apple’s stock reversed and started trading above the 30-SMA. At the same time, the RSI showed solid momentum when it got overbought. For a trend trader, this is a sign that the price might start a solid uptrend.
You can wait for a breakout or a pullback to enter and hold the position. You can keep holding the position as long as the price stays above the SMA and makes higher highs and lows.
BREAKOUT TRADING
Meanwhile, breakout trading involves finding opportunities when the market pauses to regain momentum before continuing higher or lower. Breakouts can occur during a trend or consolidation.
During a trend, pullbacks can create good opportunities to catch the price breaking out of a corrective move to continue the prevailing trend. At the same time, during a trend, the price can break out of its trendline, indicating a reversal.
Meanwhile, when the price is ranging, breakouts in the direction of the previous trend creates good trading opportunities.
Breakout trading
Amazon’s stock was on a strong downtrend. However, the price paused when it got to 136.73. This level became a strong barrier that led to a period of consolidation. A breakout trader will wait for a strong move below this level to enter a sell order.
Eventually, the price gapped below the support. A gap shows a massive surge in momentum, a clear sign that the downtrend will continue. For some traders, this is enough to enter a position. Meanwhile, others will wait for the price to retest the level and continue lower before they enter a sell position with appropriate targets.
What separates winning prop traders from the rest is a clear strategy that defines entry and exit conditions. Moreover, this strategy should return a profit in the long run. Therefore, you should have a good risk-reward ratio to ensure you manage risk and make strides with the rewards.
Join FTMO or TradeThePool today and start working on a challenge. Use the above strategies to improve your chances of passing a challenge and getting funded.
