Finding Your Trading Style
Most of the people who are introduced to the financial markets are usually first introduced to investing. The purpose of investing is to build wealth slowly over time, and the aim of such people is usually to create a nest egg that will provide stability and income during their retirement years. Those people typically accomplish this aim using the popular buy-and-hold strategy of investing. They buy different financial assets such as stock, mutual funds, and exchange-traded funds (ETF) and wait patiently through the many fluctuations in price for an eventual increase in value and the reaping of positive returns on their investments. For such investors the greatest ally is interest compounding which can significantly amplify their long term returns.
While those investors buy and hold financial assets for years, traders on the other hand buy and sell stock, currency, options, and other financial instruments for the purpose of generating profits in the short term. Since traders take profits regularly from the buying and selling of those financial assets, they tend to view their profits as income, unlike investors who generally hold their positions for the long haul. The aim of traders is to buy financial assets low and sell them high or in the case of shorting, to sell them high and buy them back when they are low within a relatively short time which can vary from seconds or minutes to even months, depending on the styles of respective traders. Generally traders enter and exit trades within shorter times compared to investors.
There are four main trading styles, and none is better than the other. The difference between the styles is the time length for which the trader holds the trade. The trading styles are scalp trading also known simply as scalping, day trading, swing trading, and position trading. Scalpers hold trades between seconds and minutes. Day traders ensure they enter and close all their trades on the same day. Swing traders hold their trades for a few days or weeks while position traders, the most patient of the four, can hold their trades from a few months to some years. Choosing the best trading style for you can be a challenging decision to make, but it is essential for your long-term success as a trader.
Scalping
Scalping is an extremely active and rapid style of trading. Scalpers make trades throughout the trading session, entering and exiting their positions within just a few seconds of each other. Scalpers can be long in one second or minute and short in another. Their aim is to capture a small gain on each trade within a short time. Hence, they usually have to place a lot of winning trades to be able to make substantial profits. Scalp trading is very risky, and is only ideal for traders who can maintain concentration and focus in the face of stress, and can also quickly make informed decisions without any hesitation. Hence, if you are easily distracted, if you find it hard to maintain your concentration and make informed decisions under stressful conditions, scalping is not for you. But are you impatient? Good news! For you scalp trading may just be the best.
Day Trading
Day trading has been gaining more and more popularity in recent times. Day traders do not hold positions overnight; they enter and close all their positions on the same day using different tactics such as profit target, stop loss, and order types. Day trading is suitable for traders who are not comfortable with the prospect of going to bed with open trades on the screen. However, as it is true also for scalping, it is difficult to be a part-time day trader because positions opened in day trading demand constant monitoring, and also because many trades have to be made to be able to build frequent gains into significant profits. Hence, if you would not mind becoming a full-time trader, you can consider scalping or day trading.
Swing Trading
Swing trading is a relaxed and far less rapid style of trading compared to scalping and day trading. Swing traders rely mostly on technical analysis to capture short term market moves. It takes place over a period of days or weeks, and does not require constant monitoring as much as scalping and day trading do. Swing traders use technical signals to determine potentially profitable entry points for trades and they exit their positions once they meet their previously established profit targets, or when the market moves against them, or after a specified period has passed. Swing trading is appropriate for part-time traders who are uninterested in constantly monitoring their trades. However, it may not be suitable for those who find holding positions overnight unnerving.
Position Trading
Position trading is the trading style that spans over the longest time frame. Position traders generally hold their positions for months or years. This set of traders usually use both fundamental and technical tools in their analyses. Also, position trading is the style of trading that most closely resembles the conservative buy-and-hold strategy of investing. If you want to keep your full-time job, if you are comfortable with keeping open positions for months or years, and you would not mind ignoring short term rises in price for the sake of long term (but not too long!) prospect for greater gains, you would most likely do very well as a position trader. In general, the longer your time frame, the less time you will have to devote to studying the markets.
In conclusion, which style of trading is the best? Should you use strictly fundamental analysis or technical analysis, or both? Should you be a part-time or a full-time trader? There are no definite answers. You should instead consider some factors such as your personality type, your tolerance level for risk, the size of your account, your personal goals, and the amount of time you will be willing to dedicate to the markets to make your choice. Whether you use fundamental analysis or technical analysis will depend on those factors, too. Long term investors usually use fundamental analysis to evaluate the quality of their long term investments, while active traders often use technical analysis to trade. However, successful traders like Nicolas Darvas who combined both fundamental and technical analyses (you can call them techno-fundamentalists!) indicate that the combination of both may also be equally beneficial.
To find the right trading style for you, you have to first know yourself. For if you do not know yourself, the stock market is a bad place to find out.
