A lot has changed in the trading industry. The days when trading was a preserve for professional brokers is long gone. Today, all you need to trade is reliable internet and a computer/mobile device. According to a study by Financial Industry Regulatory Authority (FINRA), retail investors increased by 38% in 2020.
However, it’s important to do thorough research before diving head first into the markets. As a beginner, you need to learn the lingo, find a broker, and choose a suitable market. Moreover, the most important thing is picking one trading style and perfecting it.
Let’s take a look at a few trading styles to explore what makes them different, and give you a better idea of what you may be interested in using.
Factors to think about
It’s always a good idea to experiment with all trading styles when starting. In the long run, you have to choose one out of the four main options. Each trading option has its ups and downs, which is why you should spend some time learning them. Here are some of the factors you should consider when picking a trading style.
Time
Time is one of the most important factors when trading. The biggest difference between the trading styles is the amount of time your money is in the market. Think about how much time you will trade on any given day. If you have a day job, then pick something a little less time-consuming.
Position trading is perfect since trades may take up to a year. It requires a lot of patience. On the other hand, if you have time to sit in front of the computer, then day trading is the right fit. It is also perfect for those looking for quick gains rather than long-term investments.
Money
Finances are always a factor in any investment. The first thing you need to think about is the initial investment. You will need to buy assets to start trading. Day trading is typically more expensive. There is a minimum balance requirement of $25,000 for day trading stocks.
In addition to the seed money, you also need to consider commissions and fees charged by brokers and exchanges. For those with limited capital, consider scalping or swing trading. You can get started with as little as $120 for scalping.
Risk Tolerance
There is some degree of risk in any trading. The question is, what level of risk can you handle? For some people, the excitement outwitting the market is part of the appeal. Day trading often carries more risk due to the amount of capital you have to put in.
One can lose a sizable chunk of capital in a matter of minutes. However, if you can’t handle the pressure of day trading, try swing trading or position trading. Whatever you decide, always employ risk management strategies such as the one percent rule.
Goals
People have different motivations for joining the trading community. For some, it is just a side hustle, and they only do it for the excitement. For others, trading is a full-time job. If your goal is to make profits by taking advantage of small market fluctuations, then day trading is the way to go.
For those willing to wait a day to several weeks, swing trading is more of the ideal choice. However, if you are looking for something long-term, then position trading is where you should focus on (buying and holding).
Day Trading
As the name suggests, day trading involves opening and closing trades within the same day. The idea is to reduce losses by limiting holding times. Day traders make their money by holding a position for as short as a second or a minute. However, you can only make money from these slight price fluctuations if you trade with a large amount. You will have to execute several trades on any given day to make a significant profit.
This type of trading is ideal for people who prefer to close their trades before going to bed. Some peace of mind comes with not having to worry about overnight price action. To cut it as a day trader, you will have to be decisive and disciplined. A slight delay in executing a trade, and you could lose out on an opportunity of a lifetime.
Having the right personality isn’t enough. Day trading requires investment in technology. Traders often need all the help they can get to compete with hedge funds and other big-time brokers.
In addition to a decent computer, day traders also spend money on charting software and access to live market data from resources like Benzinga Pro. While day trading can be profitable, it is also very risky. Be mindful of the regulations, such as the Pattern Day Trader rules.
Scalp Trading
Scalp trading is a form of day trading. This trading style focuses on small price jumps. The holding time is usually minimal, often seconds, and at most a few minutes. To maximize profits, scalp traders must time the existence to perfection.
In a day, the trader must successfully pull several such trades. The small wins add up into significant gains if you are doing it right. Scalping is so popular that most people refer to it as ‘day trading.’
However, it’s not the only form of trading available. Another popular option is momentum trading. Unlike scalping, it is less demanding in terms of analysis. You need to scan for active stocks or assets and trade following the existing momentum. However, the trick is to jump off before the trend changes. Momentum trading is often riskier than scalping. However, both are quite similar and require the same set of tools.
Swing Trading
Swing trading is a variation of day trading. It involves holding positions for a more extended period to allow a trend to play out. Most swing traders hold their trades overnight. However, it is possible to hold a position for weeks before executing a trade. Since the swing trades take overnight risk exposure, the stake must be significantly less than you would put in day trade.
Swing trading requires a broader set of tools than day trading. To succeed, you need both fundamental and technical analysis. In addition to 60-minute charts, you will also need daily and weekly charts. Other useful tools to have include analytical reports, news feeds, and company filings. Such resources will help identify the potential catalyst for price moves.
Armed with this information, you also need to wait calmly for the right opportunity to execute a trade. One of the most significant advantages of swing trading is that it requires less time. It is more of a waiting game.
The nice thing about swing trading is that you don’t have to be glued to the computer. The best market for swing trading is large-capitalization stocks (i.e., Amazon, Disney, Meta Platforms, etc.). You can also have some success swing trading in the foreign exchange markets (forex).
Position Trading/Investing
Position trading is the most prolonged time-frame trading strategy. The trading periods are longer, ranging from a few weeks to even years. Due to the long periods, position trading is often referred to as investing. Position traders focus heavily on fundamental analysis with a bit of technical analysis for interpreting trends.
Succeeding in position trading requires a great deal of patience. Traders must be willing to ignore the short-term noise in favor of long-term gains.
Position trading is not for you if you have trouble making unpopular decisions. For instance, you should be able to hold a trade position even when the economy is tumbling. Below are a few valuable strategies.
- Support and resistance: The most prevalent techniques are support and resistance trading. Support is the lower expected price dip, while resistance refers to the highest expected price. Previous support and resistance levels are reliable indicators of where the prices are likely to go.
- Pullback and retracement: A pullback refers to a short-term dip in prices during a rising trend. On the other hand, retracement refers to the general reversal of a prevailing trend. Pullbacks are more critical since traders can buy low and sell high.
Due to extended periods involved, position trading must incorporate diversification in their trades. This helps limit losses, and in case things don’t work out. Position trading is for passive traders interested in long-term investment. In most cases, the goal is retirement.
Final Thoughts
Hopefully, this article helps gives you more insight into picking a trading style. Trading can be quite dangerous, especially if you’re a beginner. Picking a trading style allows you to not only perfect your craft, but also minimize losses and potential rookie errors.
When choosing a trading style, consider all factors: budget, available time, and risk tolerance. To get better, you should stick to your style of choice. Don’t start switching up at the first sign of danger. You will eventually get better with time. As the old saying goes: practice makes perfect.
