Different Styles of Trading
Picking a specific style of trading is very important for all aspiring traders. The same jacket doesn’t fit everybody and you must pick the most ideal trading style according to your lifestyle, personality and objectives.
1. Value Investing:
Value investing involves buying a stock or security with the intention of holding for a very long time (20 years plus!) or perhaps with the intention of never selling. A value investor is never trying to speculate and make a return based on short-term price movements. They essentially want to hold the particular stock for as long as possible and potentially depend on dividends for their source of income. However, most value investors reinvest their dividends back into the same stock.
Extensive knowledge on fundamental analysis, economic trends and central bank policies
“Big picture” thinker
Faith in their country, government, central bank and generally in the system
2. Position trading: It is very common to mistake this style of trading for investing.
Remember there is no such a thing as investing for 3-5 years. If you ever buy a stock with the intention of selling in a few years that is considered a trade not an investment!
Typically, when you develop on idea based on fundamentals, techncials or ideally both you take a position and as time goes on you can observe whether your idea or throaty is correct and you adjust your position accordingly. This is the most common trading style among retail investors so you can expect lots of competition.
Decent knowledge on both fundamental and technical analysis. Fundamental analysis is implemented to form an idea for a position trade and technical analysis is implemented to execute that trade
Contrarian mindset: Since this is a popular trading style, you need to understand crowd psychology and go against the crowd most of the time!
Patience: You still need patience to be able to see your position trade and idea come to fruition.
3. Swing trading: This style of trading involves holding a position anywhere from a few days to weeks or even possibly months. This is perhaps the most common trading style among new traders
. Extensive knowledge on technical analysis: When swing trading you only hold a position for a short period of time so there is simply not enough time for fundamentals to come into play and your trade execution becomes more important which requires technical analysis.
. Some basic knowledge of fundamental analysis is still needed to increase your chances of success.
. Understanding how the overall market and major indices such as S&P500 and NASDAQ trade. Since you are holding a position for a short period of time, your trade can be greatly affected by price movements in the overall market
. Understanding the market sentiment: Before you can develop a contrarian mindset you need to understand how the majority of traders are thinking
4. Intra-day trading: Involves trading during market hours and never holding a position overnight! This style of trading is most popular among professional and competent traders.
. Extensive knowledge on technical analysis: Trading execution is the only thing that matters when day trading and for that you need technical analysis.
. Mental clarity and discipline: You need to be fast, reactive and most importantly clear when day trading that’s why day trading is not for everybody and you need to appreciate the importance of trading psychology.
. Money management and risk control: A day traders is being exposed to risk on a daily basis so learning how to define and control risk is extremely important.
5. Income generation: This trading style is most suitable for traders who are looking to make a consistent income that is somewhat predefined, and they can rely on.
. Extensive knowledge on options and derivatives: Generating a consistent income in this game is only possible by selling options and creating appropriate option spreads and you need to learn how to use this trading instrument fully.
. Extensive knowledge on technical analysis.
. Extensive knowledge on probability and statistics: Selling options involves substantial risk and understanding probability is absolutely essential
. Extensive knowledge on risk control
6. System and mechanical trading: Whether you are a swing trader, day trader or options trader you need to eventually develop a system that allows you to trade effortlessly and without much thinking. A trading system is set of rules and guidelines that you have developed over time that gives you an edge in this game of probability.