MODERN QUANTITATIVE FINANCE
Five Different Trading Styles
In this article, we take a look at trading, and not investing
For a beginner, a way to know which trading style would fit you is to experience the game of market playing (with paper trading).
Now, there are different types of trading styles. Some traders only stick to a particular instrument or asset class, while others have a more diverse portfolio. Trading the news and financial reports are another form of trading styles adopted by many traders.
But, we’ll take a look at trading styles according to carpe diem [(i) and (ii)] and according to the timeframe:
(i) Those who get $4700 and carpe diem by suppressing greed and doing non-trading activities e.g. gym, singing Gregorian chants, smoking cigars, etc.
(ii) Those who get $4700 and carpe diem by doing extra trades — and likely to take a loss hit greater than they earned. These are called FOMO retail buyers in retail trading.
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(iii) Day trading vs Swing trading: Day trading is for the masochists, as day trading on a margin (borrowed money) can quickly put you into debt; while swing trading doesn’t heavily rely on a margin.
- While proponents of day trading (aka intraday trading) say it’s like liking offensive guitar sounds, critics say it’s the snake oil of market investing. Why such an opinion from the critics? The unbelievable frequency from the perspective of investing (not trading)! Day traders make near-thousands to thousands of trades a year.
- A day trade occurs when you buy and sell shares between market open and close; but not if you hold your position overnight. In night trading, you buy at the end of the day and sell at the next day.
- Day trading can also include ‘stock long-term day trading’ i.e. buying lows and selling highs on the same stock, daily, for as long as you plan to hold the stock.
- Day trading requires greater time commitment than swing trading; as such it is not recommended to a beginner since it can be most stressful. In more details: day traders change positions at small intervals ranging from 1 minute to 15 minutes and they have to constantly monitor their positions to make sure they are still profitable; thus, day traders are usually full-timers as part of a corporation or independently. You can do swing trading in a part-time basis (and less stressfully) as you generally hold positions for several days (days swing trading) or weeks (weekly swing trading) in an attempt to capture short-term market movements. Swing traders, on the other hand, devote few hours e.g. 2 hours per day to analyse the markets to determine or modify a position. Swing traders will likely make 25 to a few hundred trades a year.
- If you are a day trader or you just want to make a ‘quick buck’ by capital gains, day-to-day movements matter but fundamentals don’t. As positions are entered and exited (using a profit target, stop loss, or time exit) on the same day, day traders usually use technical analysis to exploit intraday price fluctuations using intraday price charts.
- Start-up costs (e.g. trading software, trading platform) for day trading on individual basis can be more expensive than for swing trading; as day traders compete with hedge funds, HFT firms, etc. whose entire businesses involve having trading advantages.
(iv) Position trading vs Scalp trading: Position trading is a longer-term trading style in financial markets where the trader holds positions for weeks, months, or even years (much longer than day trading or swing trading). It requires least oversight since minor/short-term price fluctuations aren’t a concern; thus position traders, say, spend just a few hours per week setting up trades.
- Position traders make between 0 and 3 trades a year in stocks that they own.
- Position traders use a combination of technical analysis (weekly and monthly price charts to time each individual trade) and big picture fundamental analysis (more attention to fundamentals than swing traders) to make trading decisions. Scalpers are rare than day traders, but they are basically the opposite to position traders — they’re shorter-term (than day traders); they require much more of a constant attention to the markets; and they may place a dozen or even hundreds of trades each trading session. Scalpers use 1-minute charts to see setups as they shape up as close to real time as possible with the goal to sell every time a profit window appears, as many times as possible. The S&P 500 futures, being one of the most active and electronically accessible market, presents the good chances for picking ‘unexciting’ consistent profits for a scalp trader. Scalping set-ups are named as: The 15-minute Opening Range scalp, the 10 o’clock jiggle, the 3 o’clock jiggle, the penny pincher, the 5-minute Standard Deviation scalp, and the ANTI.
- Advantages of scalp trading are: the lesser you hold a position than a day trader, the lesser your capital is at risk; consistent small gains than those of a position trader are more likely achievable than a large goal; you are able to be wrong quickly and cheaply (thus allowing you to still have resources to focus on a better trade). In summary, taking a large loss is more damaging than the small commissions to exit the trade with a small loss. Scalp trading, as is any trading style, is scalable; thus, it can result in huge profits.
Final Thoughts on timeframe trading:
(A) If you’re holding a stock long-term, buy more if you think the company is dropping for no reason. If you’re short-term trading and trying to ride a wave, set a stop-loss (as a market can crash. It has historically crashed over a number of intervals for somewhat similar reasons. The longer the crash having not yet occurred, the more market participants fear of an incoming crash. Quoting Feynman, “When playing Russian roulette, the fact that the first shot got off safely is little comfort for the next”).
(B) Don’t sell and realize losses (thus lose money) unless you think the company won’t recover.
The question is not that how much alcohol is there in the bar…the question is how much can you drink.
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