How to Know Which Trading Style is Best for You
You’re a trader, not an investor. It’s important that you understand the difference before choosing an actual trading style. Traders perform their magic over shorter periods of time, sometimes within minutes or hours. Investors are more passive. They purchase equities and hold them for months or years, relying on a long-term return.
Traders evaluate buys and sells based on technical analysis. They track historical price trends using graphs and charts, buying in the troughs and selling when the slope is rising. Investors use more fundamental analysis, studying industry research, company balance sheets, and news releases. Trader’s activity windows are too small to get into that level of detail.
So, which are you? A trader or an investor? If you’re a trader, you need to be vigilant and watch the market closely for intra-day movement. You can do well during periods of high volatility. Those who succeed in this profession are people who thrive on accelerated activity. If that’s who you are, review the trading styles below to see which is the best fit for you.
Scalp Trading for Base Hits
If you feel the need for speed, this will definitely get your adrenaline going. Scalp trading is an intra-day trading style where positions are bought and sold in periods of seconds and minutes. You don’t hold anything for a long period of time. The idea is to buy larger positions with a high probability of upward movement. The pace is hectic, but the upside is high.
The key to scalp trading is never to hold a position longer than a few minutes, whether you score a gain or a loss. It’s a numbers game. Make enough trades during a day and you’ll end up on the plus side, if your technical analysis is on point. You’ll also need an equity balance of at least $25,000 in your account. Trading platforms won’t let you scalp trade without that.
Gains from scalp trading are called “base hits” because they’re small wins that add up to compounding profits. This style has sometimes been compared to playing blackjack. You can rack up wins fairly quickly, but you can compile losses at a rapid pace too. Good research skills and a comprehensive knowledge of finance are both required to be a scalp trader.
Day Trading aka Momentum Trading
Scalp trading is day trading, but momentum trading is usually what people are referring to when they talk about intra-day activity. It’s more common. Scalp trading is a full-time job. You don’t have time to do anything else. Momentum trading is buying low (in the trough) and selling when a position is on the upslope. The trick is to sell before another decline.
Momentum traders often have another job, usually something they do on their laptop or desktop. These folks buy a position when it’s low and watch it over the course of the day as it starts to climb. Technical research determines roughly where it will peak, so keeping another tab open to work a regular job is okay, as long as the sell window isn’t missed.
The best way to do momentum trading is to use automation to set sell prices and stop loss amounts. Similar to scalp trading, your technical analytics will make the difference between success and failure. Remember, you’re betting on price trends, not media. Those articles in Seeking Alpha and Business Insider are written for investors, not day traders.
Position Trading and Swing Trading
Looking for something more passive? Swing trading is similar to momentum trading, but you hold the position overnight or through the week. Position trading is more long term, with trade cycles that can range several months, even a year. It’s not the same as investing. Trade decisions are based on technical analysis and price projections, not fundamental analysis.
With discount brokers offering no-fee trades, position trading has become popular with the newbies in recent years. Since this isn’t day trading, there’s no equity requirement. Aspiring traders can open an account with Schwab or Robinhood and start trading with only a few dollars. If you’re just looking to get your feet wet, this is the option for you.
The larger the position, the higher the potential return. If you’re trading penny stocks (anything under $5 per share), you’re going to make pennies. They’re also the most volatile. For best results, look at slightly more expensive equities and save the small fish for cheap option trading. That’s another skill you’ll want to learn at some point.
Automated Trading (Algorithmic Trading)
Machines are faster than humans. When it comes to day trading, that’s an important point to consider. If you use an automated trading system, you have the ability to create buy and sell orders and set rules for entries and exits. With that type of technology, the output of one trader can be increased dramatically. It also eliminates the need to “watch the shop.”
Automated trading platforms are generally not a good fit for long-term investors looking to buy and hold. Active traders, particularly those using momentum, position, or swing-style trading methodologies, would be remiss not to use automation if its available. Scalp traders can benefit from it also, but the programming is more complex, and the risk factor is high.
Tickeron uses automation to track volatility and provide buy and sell recommendations. Their proprietary AI algorithm analyzes past scenarios similar to any trade you want to make. This gives you valuable insight into what’s likely to happen in the time frame you choose to hold your position. They also provide the automated trading platform to make paper trades absolutely risk-free. Below is the example of a Tickeron’s Forex automated trading bot, which has been demonstrating a positive dynamic since its inception:
The Psychological Profile of a Day Trader
Anyone can be a trader, at least for a little while. To do it long term and be successful, there’s a certain type of mindset required. A trader has to be aggressive and not afraid to take risk. You could open one of those Robinhood accounts and trade penny stocks all day. That’s not what we’re talking about. Real traders want to hunt elephants, not muskrats.
Day trading is not a hobby. The fact that you need a minimum of $25,000 equity to start should make that pretty clear. Anyone looking to seriously do this for a living has to be fully dedicated to the task. Discipline is required. Most traders have a very structured schedule that usually includes time in the gym every morning, high-protein diets, and lots of caffeine.
Day trading is also not for the weak-hearted. Millions of dollars move through Wall Street every day and your job will be to take as large a piece as possible. Some days that won’t happen. A trader needs to be able to pick themselves up and go at it just as hard tomorrow. Losses are a part of this life. If you can’t handle that, find another profession.
The Decision to Become a Trader
Everyone who buys and sells stocks for a living has one goal in common. They want to make money. Those who make the most money are generally the ones who take the most risk. Scalp trading is a high-stakes gamble. Holdings are large. Gains and losses happen in minutes. Position trading is less risky. You have several market cycles to recover from down-swings.
Your choice of trading style should be based on the type of lifestyle you want to live. Day trading of any kind is stressful and requires constant market monitoring. Position trading and long-term investing are more passive. You can buy and sell at your leisure. Decide which of these lifestyles suits you best. Think about your time availability and commitment level.
Another factor to consider is the level of education required for each trading style. Active traders need a direct access trading and charting platform. They should be familiar with Sharpe ratios, drawdowns, puts, and calls. Passive investors use media and financial reporting to make trade decisions. Your knowledge of these concepts can help you choose a trading style.
Practice on a Trading Simulator First
You’ll want to practice each of these trading styles before you make your final decision. There’s no reason to use real money. Tickeron offers a risk-free trading simulator called Paper Trade that gives you access to all of their features and knowledge base. Watch their video on YouTube and then jump in and tool around a bit. It’s free and you don’t have to add funds to trade.
WATCH this FREE VIDEO TUTORIAL
Knowledge is power. You won’t learn everything about trading overnight. Continue to study. Everyone loses money when they first start out. Those who stick with it can make a very nice living. We don’t recommend that you quit your job and start day trading today, but that could be a possibility down the road. Just think of the freedom that would bring to your life.
The choice you make for trading style does not have to be a permanent one. Lots of folks start with position trading and gradually work their way up to swing and scalp-trading. Some start doing day trades and decide a more passive trading or investment strategy is a better fit for them. That’s the beauty of Tickeron. You can try them all.