Are you unsure whether your trading style is closer to that of a position, a scalper, a day trader, or a swing trader? Or are you perhaps a mixture of all four?
Whichever one applies to you, it’s important to find out, because knowing your preferred trading style and temperament is a critical part of trading successfully in the long run.
Why? simply put, traders can reach the best synergy when their strategy and trading psychology are aligned.
The mentality associated with an active trading strategy differs from the long-term, buy-and-hold strategy found among passive or indexed investors.
Active traders believe that short-term movements and capturing the market trend are where the profits are made.
There are various methods used to accomplish an active trading strategy, each with appropriate market environments and risks inherent in the strategy.
Here are four of the most common active trading strategies and the built-in costs of each strategy.
Knowing which style suits you best remains a difficult question to answer, but luckily, this article will help you in multiple ways.
First of all, it will explain all of the four styles in more depth, then it will identify the main differences between them, and lastly, it will compare them and provide an overall conclusion.
2.0 Day Traders
Day trading is perhaps the most well-known active trading style. It’s often considered a pseudonym for active trading itself.
Day trading, as its name implies, is the method of buying and selling securities within the same day. Positions are closed out within the same day they are taken, and no position is held overnight.
The day trader’s strategy is to focus on the best opportunities of the day, and to hold on for a larger profit target.
Therefore, a day trader usually holds on to a trade for several hours but not more than one full trading day. Ultimately the goal of a day trader is to aim for a larger piece of the expected daily price movement within one trade.
Here are three key aspects that day traders need to keep their eye on:
- Day traders are waiting for the price to reach major decision spots on the chart, which offer the most profit potential in terms of the expected win percentage versus the expected size of the with.
- They need to be patient as the price moves up and down, with and against their position multiple times per day.
- They must also stick to their trading plan, and not yield to the temptation of exiting a trade too soon, because otherwise they risk turning the trade into a scalping setup.
3.0 Position Traders
Some actually consider position trading to be a buy-and-hold strategy and not active trading. However, position trading, when done by an advanced trader, can be a form of active trading.
Position trading uses longer term charts – anywhere from daily to monthly – in combination with other methods to determine the trend of the current market direction.
This type of trade may last for several days to several weeks and sometimes longer, depending on the trend.
Position traders are focused on long-term price movement, looking for maximum potential profits to be gained from major shifts in prices.
As a result, trades generally span over a period of weeks, months or even years. Position traders tend to use weekly and monthly price charts to analyse and evaluate the markets, using a combination of technical indicators and fundamental analysis to identify potential entry and exit levels.
As position traders are not concerned with minor price fluctuations or pullbacks, their positions do not need to be monitored the same way as other trading strategies, instead occasionally monitoring to keep an eye on the major trend.
4.0 Swing Traders
When a trend breaks, swing traders typically get in the game. At the end of a trend, there is usually some price volatility as the new trend tries to establish itself.
Swing traders buy or sell as that price volatility sets in. Swing trades are usually held for more than a day but for a shorter time than trend trades.
Swing traders often create a set of trading rules based on technical or fundamental analysis. These trading rules or algorithms are designed to identify when to buy and sell a security.
While a swing-trading algorithm does not have to be exact and predict the peak or valley of a price move, it does need a market that moves in one direction or another.
A range-bound or sideways market is a risk for swing traders. Swing traders maintain vigilance for a potential of greater gains by indulging in fewer stocks, helping to keep brokerage fees low.
The strategy works well for those unable to stay glued fulltime to the markets, keeping a minute by minute track of things.
The strategy of swing trading involves identifying the trend, then playing within it. For example, swing traders would usually pick a strongly-trending stock after a correction or consolidation, and just before it’s ready to rise again, they would exit after pocketing some profit. Such buying and selling methods are repeated to reap gains.
5.0 Scalp Traders
Scalping is one of the quickest strategies employed by active traders. It includes exploiting various price gaps caused by bid-ask spreads and order flows.
The strategy generally works by making the spread or buying at the bid price and selling at the ask price to receive the difference between the two price points.
Scalpers attempt to hold their positions for a short period, thus decreasing the risk associated with the strategy.
Additionally, a scalper does not try to exploit large moves or move high volumes. Rather, they try to take advantage of small moves that occur frequently and move smaller volumes more often.
Since the level of profits per trade is small, scalpers look for more liquid markets to increase the frequency of their trades.
And unlike swing traders, scalpers like quiet markets that aren’t prone to sudden price movements so they can potentially make the spread repeatedly on the same bid/ask prices.
- Scalpers are quick, seldom espousing any particular pattern. Scalpers go short in one trade, then long in the next; small opportunities are their targets.
- Scalpers usually follow short period charts, such as 1-minute charts, 5-minute charts, or transaction-based tick charts, to study price movement of and take calls on certain trades.
- Scalpers seek adequate liquidity for its compatibility with the frequency of trading. Access to accurate data (quote system, live feed) as well as the ability to rapidly execute trades is a necessity for these traders.
- Scalping is best suited for those who can devote time to the markets, stay focused, and act swiftly. It’s usually said that impatient people make good scalpers as they tend to exit from a trade as soon as it becomes profitable.
Active traders can employ one or many of the aforementioned strategies. However, before deciding on engaging in these strategies, the risks and costs associated with each one need to be explored and considered.
Choosing a trading style requires the flexibility to know when a trading style is not working for you, but also requires the consistency to stick with the right trading style even when it is not performing optimally.
One of the biggest mistakes that new traders often make is to change trading styles (and trading systems) at the first sign of trouble.
Constantly changing your trading style or trading system is a sure way to catch every losing streak. Once you are comfortable with a particular trading style, remain faithful to it, and it will reward you for your loyalty in the long run.
Categories: MUTUAL FUND, IPO AND EQUITY SHARES