When it comes to finding an approach to trading, I think it's very important to know how it will fit into your personal lifestyle and what you want out of life as a whole. We're all very different and some people have regular jobs they go to during the day time, so obviously, there's no way they can be day traders. They're better suited to swing or position trading. Other people like to trade the first hour of the day and the last hour of the day, so by necessity, they're scalpers and momentum traders.
Personally, I do a combination of trading styles that depends on what the market environment is telling me. I also adapt my trading style to fit within the other responsibilities that I have going on in my life. If I'm very busy, I can't sit and scalp and day trade. I tend to go toward more swing and position trading.
The trading style that fits traders best is governed by so many factors in each trader’s life. Risk tolerance and account size represent very definite factors. If you're trading with a few thousand dollars, you can't be trading in and out all day.
Here is a look at a few of the most common types of trading styles. The examples may help those of you trying to find your own approach to play the market.
Scalping is when a trader goes into a position hoping to gain a fraction of a dollar or a few cents per share on the trade. Maybe they're going to make 8 cents, or 12 cents or 25 cents, but they're in the trade for only a few minutes. A scalper will typically move in and out of trades like these all day. It requires a lot of time and patience, and I don't recommend it to any but a few traders, these days. Before decimalization took effect in 2001, traders used to buy the bid price and sell the ask price and capture the spread between the bid and the ask. To me, that's when this style lost a lot of its charm. I know a lot of guys who used to execute 200 trades a day. Many scalpers would make a lot more than that.
You can make money scalping if you can trade big share size. like a few thousand shares per trade. But if you can only buy a few hundred shares, then you're asking for rough time. Even if you're only paying $5 in commissions each way, you have to be really good to make any money. The high rate of slippage and commission fees is a concern with scalping.
Momentum Trading/Day Trading
This is also known as intraday trading, and virtually everything we do is on a chart. We eat, live and breathe charts. I probably do a style that is simpler than most every other trader and we do it this way in Toni's Market Club too. We get our setups from a daily chart and look for the primary trend, so either an uptrend or a downtrend. We have certain parameters that we use, then we drill down to an intraday chart, perhaps a five-minute or 10-minute chart, or even 13-minute charts or eight-minute charts. I don't want to be on a five-minute increment chart because that's where everyone else is. I want to look at something slightly different than every other trader. To me, it gives me an edge.
I just use the 8-period and 18-period moving averages, and if the setup is correct on a daily chart, I can use those crossovers to trade on an intraday chart. Again, if the setup is appropriate, we buy the upside crossover. When we get the downside crossover, we take profits. It's a very simple formula. We could make it a lot more complicated, but after years of trading, I don't see the point in making it much more complicated, especially when the strategy works.
The general meaning of swing trading is when you buy a stock or financial instrument and hold it from an average of one to five days, or for the duration of the upswing on a daily chart, or perhaps you sell short the down-swing on a daily chart. This is a very popular trading style. We swing trade a lot in Toni's Market Club too, and I trade this way, personally. The parameters can be pretty clear cut. You can learn one or two setups that will consistently deliver profits. This assumes you are a reasonably skilled trader, and hold to your risk and reward ratios and your trading plan. With this style of trading , you need not—really should not--sit and stare at your trade all day on an intraday chart. If you do, the trade will tend to wear you out, or scare you out.
Position Trading/Trend Trading
This is probably the simplest style of all, but you have to buy at the right time, and more importantly, you have to get out at the right time. Basically, you can find a stock with good fundamentals trading in a base or in a consolidation, and if it breaks out of that base and has room to make new highs, you can simply hold that stock for the duration of an uptrend. That can be for weeks to months as long as it can continue to make higher lows and higher highs. When it rolls over, ultimately, if it makes a lower low on a daily chart, you exit the trade and take your profits.
Fundamental Trading or "Active Investing"
It is a wise trader who, if they're going into a long position, takes a look at a company's fundamentals to make sure that that they are positive and appear to be expanding. On the other hand, if that trader is targeting a short position, then he or she wants those fundamentals to look negative. I know people who trade on fundamentals only, but quite honestly, price and fundamentals can be so elastic that it's not a style that suits me. I'd rather team up fundamentals with technicals, and have both those in my corner when I get into a trade.
For this style, I use the term "active investing." There are certainly people who invest on fundamentals and I think its because investors became more hands-on after they lost so much money in the bear market of 2000-01, and then again in 2008-09. All of a sudden, investors who had just handed their portfolios to a financial advisor--and got very hurt in the process because they didn't have protective stops in place-- these people started getting more hands-on. They realized that they didn't have to ride what might have been a profitable position early on...all the way down to a loss.
Now more people are putting their hands on their portfolio. Thankfully, they are taking the time to learning about the market and stocks. They are gaining a wider knowledge of what's going on in the financial markets, and I applaud them. The next time we have a market turndown, they won’t repeat the mistakes of the past.
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