What Style of Trading Fits You?

David Frost // Blog


January 23  

Aligning your personality with the right type of trading will make your trades more lucrative, or at the very least keep you sane.

trading styles

Most people don’t realize the many types of trading styles that exist. You have day trading to swing trading, momentum trading to options trading. When they hear about trading, they automatically conjure up images of a person glued to their seat in front of stacks of monitors. They imagine endless hours of watching tickers with the news on in the background.

Some of the most successful traders I know actually trade from their phone. A handful only do about 30 minutes of work on Sunday and place all their trades for the week on Monday morning. All successful traders have one thing in common; their trading style matches who they are.

What to consider when picking a style

Imagine trying to execute a strategy that requires 100 trades a day while working a full-time job. Probably going to be tough to pull off without getting fired. If you only have $1,000 to trade with you won’t have enough to meet the  HYPERLINK “https://www.finra.org/investors/day-trading-margin-requirements-know-rules”pattern day trader minimum balance.

Consider the following questions.

·         How much time can you dedicate?

·         What is your risk tolerance?

·         How much money will you trade?

·         What are your goals?

·         What is your skill level and experience in trading and investing?

Markets you can trade

While most people think of trading stocks, other popular markets provide trading opportunities.

·         Bonds

·         Commodities

·         Futures

·         Foreign Exchange (Forex)

·         Metals

·         Cryptocurrencies

Each market has its own unique characteristics that should align with your style of trading. This includes:

·         When and where it trades

·         Who can trade

·         Products you can use to trade

·         Capital required

Here’s a look at the characteristics of several common types of trading.

Swing (Position) Trading

Time frame: Several days to weeks. Also applies to longer time frames

Risk tolerance needed: Low

Capital required: Low

Minimum skill level: Low

Time requirement: Low

Perfect for: All skills levels of traders who may not want to spend lots of time trading but have the option to if they want.

Basics: Generally, the market doesn’t move in a straight line. Swing traders aim to capitalize on the movements up and down within a stock or market. They use a variety of techniques to identify tops and bottoms and position themselves accordingly. Most look for swing (pivot) points that are defined by three or more bars, where the middle bar is making some sort of low between the others.

Risks: Overnight movements in stocks can cause price to open the following day well beyond your stop. While most traders try to define their maximum risk, they can’t always plan for the impact of unknown events. If you happened to be long in TVIX ETF in 2018, you would wake up one day to find yourself down 80% before the market opened.

Trade management: While traders don’t need to watch their positions all day, they need to be aware of them. Trade alerts and notifications really help with managing your positions. Traders should always have a target and stop. Additionally, correctly sizing your trade, along with taking enough trades, will help spread your risk and reduce chances that one trade will break you.

Day (Intraday) Trading

Time frame: Minutes to hours

Risk tolerance needed: Medium

Capital required: High

Minimum skill level: High

Time requirement: High

Perfect for: People who want to trade the market for a living. They enjoy analyzing charts, thrive under pressure, maintain self-discipline, and have the time and patience to learn and hone their skills.

Basics: You need to be prepared to commit for the long-haul with day trading. Day traders close out all their positions by the end of the trading day. This eliminates overnight risk. Most traders look for setups create their trading opportunities. They ignore fundamentals and look at things like chart patterns, technical indicators, order flow (ladders), support and resistance levels, news, or a variety of other information to assess the market.

Risks: Depending on what subset of day trading you choose, you need to learn to manage your entries and exits. And most importantly manage your emotions. Some traders make hundreds of trades a day while others may only make one a week. Regardless, they all manage their capital very well and treat trading like a business. Otherwise, you quickly blow up your account or open yourself up to rare events like the  HYPERLINK “https://www.bloomberg.com/opinion/articles/2015-04-21/guy-trading-at-home-caused-the-flash-crash”flash crash in 2010 that can force you into margin calls.

Trade management: Once traders define their system or methods, they must stick to them. Most traders know their entries, exits, and capital risk before entering every trade. Depending on the specific method, some traders need to wait for the correct setups before trading. Additionally, they need to be able to adapt to the trade if, and when things change.

Options Trading

Time frame: Days to Months

Risk tolerance needed: High

Capital required: Low

Minimum skill level: High

Time requirement: Medium

Perfect for: People who love math and statistics as well as those who have little capital to work with.

Basics: Options trade as derivatives of stocks, bonds, and other assets. Their value comes from the asset they track. Option contracts trade in lots of 100, which allows you to gain leverage for your trade. You can either be a seller of options or a buyer of options for calls (rights to purchase) and puts (rights to sell). Traders that excel at math and statistics often favor option trading, especially selling options, due to the high win rates (often in excess of 80%) without the need to day trade.

Risks: Buyers of options don’t have time on their side. Options lose value over time. When you purchase options, you must be right on both the move and the timing, which can be difficult. Selling naked options can leave you exposed to (theoretically) unlimited risk. If you aren’t careful you can receive a margin call, which forces you to liquidate your positions. You can make a lot and lose a lot with options because of their leverage.

Trade management: Simple buying of options requires the same trade management as day trading. When you create complex option spreads, as well as sell options, you need to understand where you profit and where you lose. Complex options and selling options require a deeper understanding volatility, time decay, price change, along with a host of other factors that impact the price of an option.

Final Thoughts

I know traders that trade Forex but cannot trade stocks. I know traders that trade stocks but can’t trade Forex. And, I know traders that trade everything they can get their hands on.

When you’re starting out, don’t try to be good at everything. Try to find one area that makes sense and you have an edge. Become an expert in that area. Learn a style of trading that fits your lifestyle and personality. If you pick a style of trading that keeps you up at night, switch to one that lowers the risk.

Remember, if you don’t have to love trading. But you shouldn’t hate it either.

So, what styles of trading have you found and what works best for you? Share your thoughts in the comments below.

About the Author

Trading and investing in markets is second nature to some, but a mystery to others. The goal is to provide a forum where everyday people aspiring to be part time or full time traders will learn how view markets differently and profit beyond their wildest dreams.

David Frost