One of the most common questions for financial advisors is “what is the best trading strategy?” While this question initially appears to be very straightforward, it is actually rather misleading. In fact, there is no “best” trading strategy in existence. Instead, the strategy that is most appropriate for any given trader will depend on a variety of different variables.

Most trading strategies will attempt to carefully balance risk and reward. In theory, anyone who is hoping to earn strong returns on their investment will need to take greater risks. This is a principle that is frequently referred to by traders as “risk compensation.”

The trading strategy that makes the most sense for you will depend on your current level of capital, your long-term financial goals, and the level of risk that you are comfortable assuming. When developing your own strategy, you will need to be honest with yourself and realize that any potential returns from a trade will have a corresponding level of risk involved.

In this article, we will list a few investment and trading strategies ordered from least risky to most risky. By understanding the delicate relationship between risk and reward, you can develop reasonable expectations for whatever strategy you end up choosing.

1. Non-Speculative, Long-Term Investing

In the trading world, a “speculative” asset is one whose future returns cannot be known. On the other hand, a non-speculative asset is one where the future return on investment is known in advance. In other words, non-speculative trading requires you to surrender a specific amount of capital in the status quo in order to get a “guaranteed” return on your investment in the future.

There are many different non-speculative assets available on the market. Government bonds, commercial paper, certificates of deposit (CDs), life insurance, and savings accounts are all popular options. While these assets have low rates of return, they also present very little risk. In fact, the FDIC makes it possible for some investments to have seemingly no risk at all. Any asset that has a high rating from S&P, Moody’s, and other ratings agencies can essentially be considered a risk-free investment.

1. Controlled Risk with Mixed Portfolios

Many investors and traders prefer to begin with a low-risk, non-speculative portfolio and then increase their level of risk over time. For example, after a year of predictable returns, you may want to direct some of your wealth to speculative assets such as blue chip stocks or even real estate.

The benefit of creating a “mixed” portfolio is that you can directly control how much risk you are assuming. Hypothetically, you could keep 99% of your wealth in non-speculative assets and then risk the remaining 1% in a stock or index of your choosing. This ratio is something that can be easily adjusted over time.

1. Index Stock Trading

The principle of diversification suggests that in order to avoid the risk of investing in any particular position, you should invest in many different positions at once. This way, even if one position turns out to be a failure, a significant portion of your wealth will remain.

Exchange Traded Funds (ETF) make it possible to hold a position in every single stock in a given exchange. Three of the most popular indexes are the S&P 500, the Dow Jones Industrial Average (containing 30 stocks), and the Russell 2000. On average, the S&P 500 has yielded a 9.7% rate of return over the past 90 years. Each of these funds allow you to enjoy the general rise of the market without needing to depend on a single stock performing well. As a result, ETFs are popular among the many hedge fund managers who consider themselves to be passive investors.

1. Scalping

Scalping is mildly risky due to the fact that it is a highly active, short-term trading strategy that relies on maintained liquidity. Scalpers will look for gaps existing between bid prices and ask prices (known as the bid-ask spread) and then simultaneously buy and sell a given asset (such as a currency) at once.

Each “scalp” will yield a very small return on your investment, but most scalpers will make hundreds—even thousands—of trades in a given period. Scalping is particularly popular among forex traders, due to the markets high volume of trades and high levels of liquidity. When done correctly, the risks of scalping can be easily avoided.

1. Position Trading

Position trading is an intermediate-term trading strategy that attempts to blend the regular returns of day trading with the stability of long-term investing. Most position traders will hold their positions for a period of 2-10 days. Essentially, position traders will look for trends that are stronger than ordinary oscillations, yet not necessarily indicative of a fundamental change in value.

There are many different ways you can develop a position trading strategy. Paying attention to the news, using a few key technical indicators—such as RSI, MACD, Bollinger Bands, and others—and beating the market to a given position are the best ways for you to increase your return on investment. Because all technical indicators can be somewhat misleading, position trading still has some degree of risk.

1. Day Trading

If you hope to become a day trader, the most important thing for you to realize is that not all of your positions will be winners. Instead of aiming for a perfect record, what you should try to do is maximize your ratio of winning positions to losing positions.

Day traders typically need to be somewhat risk-tolerant and also be very tolerant of consistent volatility. There are many different forms of active stock trading strategies such as swing trading, momentum trading, volume trading, and various others. Even if you are holding a losing position at the end of the day, it will still be essential to close out. As long your wins can consistently remain above your losses, you will be able to earn a considerable return on your initial investment.

1. Penny Stock Trading

The penny stock market has a reputation for occasional instances of fraud, deception, and manipulation. On the other hand, many traders have found the penny stock market to be incredibly lucrative.

Penny stocks are valued for less than $5 and are not currently listed on any major exchange. Essentially, these are the stocks that nobody wants to own, but—as a result—these are also the stocks that are among the most affordable. With a little bit of luck, discipline, and consistent commitment to your trading principles, it is possible to become a successful penny stock trader. The unusually high risk of this particular market, however, tends to keep most traders away.

Conclusion

Would you be willing to risk $10 if there was 1% chance it could quickly turn into $100? If so, you may be a risk-tolerant trader. On the other hand, risk-averse investors would rather invest their $10 in an asset that can be guaranteed to be worth $11 in one year. Neither of these approaches to the market is necessarily wrong. Once you are able to identify the amount you are willing to risk for each corresponding level of return, you can develop a successful trading strategy.