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3 Different Kinds of Trading Strategies for the Fledging Trader

The first step to trading is to know your goals: Do you want to be in this for the short or long term? How much risk are you willing to take? What assets do you want to invest in?

Your strategy, meaning how you trade, will then be built on your goals. A firm rule is to know what you want to achieve from every trade and stick to your goal. For example, if you’ve decided to be in this for the long term, don’t let panic kick in and cause you to sell when the shares start dropping in value.

After all, you invested in the stock because you felt there was a great chance that the value of its shares would go up over time. Don’t get me wrong, you can change your mind and your goals, but make sure you’re the one changing them and not fear.

So what strategies are they? Well, there are a few main ones but I will focus on 3 of them in this article.

1.  Day Trading

Day Traders are traders that buy and sell shares within the same day. To be a day trader, you have to have great technical analysis fundamentals in your head, quick reflexes, and luck. Determining how many trades you want to make per day, you may be sitting in front of your monitor for a very long time.

So, what are the pros and cons of this strategy?

Pros:

  1. Instant Results

This is a big pro f ple, especially younger people who jump into day trading expecting to make a quick buck. Because of this, they end up underestimating just how much knowledge you need and losing money. But if you play your cards right, it is very possible to learn how to day trade, and it is indeed a lucrative trade (pun intended) where you get to see instant results.

2. No Overnight Risk

Overnight risk is the risk that the value of the stock will change dramatically either in the trader’s favour or against it before the next trading period is open. It’s named this way because markets are closed during night time which is when most people sleep. Day traders avoid this risk because they close their positions before the end of the day and liquidate their assets.

But if you hold a long position, unlike a day trader, and let’s say you’re trading stocks and the shares go down from $70 to $30 during the night, there’s nothing you can do but deal with it when the markets open again in the morning or afternoon. So that’s one risk day traders sidestep, which is a pretty big pro to be one.

Cons:

  1. Stressful

When you’re a day trader, you have to deal with the value of your shares having dramatic drops and huge jumps throughout the day. Furthermore, no day trader has the luxury of brewing a cup of tea while they mull over their next move. Day traders have to be always on the ball, precise in their analyses, and confident in every trade they make. If you don’t deal well with stress or aren’t as confident in your trading fundamentals, it’s best to steer clear of day trading—at least for now!

2. Expensive

Day traders require lots of capital and resources to be able to make those split-second analyses. They have to invest in a fast computer that can run quick computations, software that can analyse the stock charts swiftly, and also other tools in their arsenal. Day traders also have to ensure they always have money on hand to take advantage of every opportunity. If you’re still a student, this may not be the wisest venture unless you already have a considerable sum of money.

So, here are some questions you can ask yourself to know if day trading is suitable for you.

  • Are you confident in your technical analyses of stock charts?
  • Are you able to keep level-headed in times of stress or prone to panic?
  • Do you have the capital to spare?
  • Does your lifestyle enable you to day trade with minimal interruptions?

If your answer to most of these is yes, you may have a future as a day trader. Still, it’s important to do your research and not jump right in. I recommend this Investopedia article for learning more about day trading.

2.  Swing Trading

Swing traders are traders who seek to make a profit from price swings in the market. These trades can last a couple of days or up to months. Swing traders normally use both technical analysis (of stock charts) and fundamental analysis (about the company) to decide whether to capitalise on a particular stock or not.

So, what are the pros and cons of this strategy?

Pros:

  1. Requires Less Time Than Day Trading

Since the timeframe of swing trading extends beyond a day and can go up to months, swing traders do not need to spend most of their time checking the daily stock charts the way a day trader would. All they have to do is track the momentum and sell their shares when the value is at its highest during the swing. If you prioritise having a work-life balance in your life, you might prefer swing trading to day trading.

2. Maximises Short-term Profit Potential

Swing traders can maximise their short-term profit potential by capturing the bulk of market swings. In contrast to day traders who only make trades within the day and hence lose out on the more profitable trades, swing traders can pinpoint the most profitable entry and exit points during a specific timeframe. If you prefer tracking changes in the market over a period of time and not just within a full day every day, then you might want to consider swing trading.

Con:

  1. Missing Out on Profitable Long-Term Stocks

Since day traders seek to profit from individual price swings, they may pull back on a stock that may lose them money in the short term but be incredibly profitable if held as a long-term investment. Examples of such stocks include Apple and Amazon.

Here are some questions you can ask yourself to know if swing trading is right for you.

  • Are you well-versed in technical analysis and fundamental analysis?
  • Is work-life balance important to you?
  • Are you fine with missing out on profitable long-term stocks?
  • Are you confident in your ability to gauge market swings accurately?

You may have a future as a swing trader if most of your answers are yes. Though, more research should be done before becoming a swing trader. If you would like to learn about swing trading indicators, I recommend this article.

3.  Position Trading

Position traders are traders who buy an investment for the long-term, expecting that the value of the stock will increase. They aren’t as concerned about the day-to-day price fluctuations the same way a day trader would be. Many position traders aren’t very active traders; they place very few trades throughout the year.

So, what are the pros and cons of this strategy?

Pros:

  1. Least Stressful

Since position traders don’t have to worry about how well a stock is doing daily like a day trader or dutifully track shifts in the market like a swing trader, they are likely the least stressed group of traders. After all, they don’t have to worry about how well the market is faring in the short term, only how well it’s performing in the long term.

2. You Can Still Work Full-time

Position trading isn’t as demanding, so you can still work a full-time job. On the other hand, day traders will need to commit to doing day trading full-time to reap profits. A big pro is that you can simply treat position trading as a side gig, if you’re unwilling to give up a stable full-time job for it, and you’ll still be able to profit from it.

Con:

  1. Less capital on hand

One con of position trading is that you’ll have less money to spare, since it’ll all be tied up in your investments that you have yet to cash out. Hence, it may not be feasible to invest in every new opportunity. Position traders have to choose their trades wisely and make sure they’ll be sustainable and profitable in the long run.

Here are some questions you can ask yourself to know if swing trading is right for you.

  • Is having a full-time job a must for you?
  • Are you fine with waiting a long time for results?
  • Are you fine having less capital to spare?

If your answer to most of these is yes, you may have a future as a position trader. It still goes without saying that more research should be done before becoming a position trader. You can read this beginner article if you want to find out more about it!

Conclusion

At the end of the day, trading will always involve risk so it’s important to do your research before heading on this journey. Now that you know the three kinds of trading strategies, hopefully, you’ll be able to make a more informed decision on whether trading is something you’d like to do, and if so, which kind of trader you’d like to be!

The post 3 Different Kinds of Trading Strategies for the Fledging Trader appeared first on Digital Senior.



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