Choosing the trading style
Choosing the trading style is one of the very first steps a beginner should consider during his evolution as a stock trader or investor. Which is right for you – day trading, swing trading or position trading? To help make your decision, let’s discuss each trading type and analyze its particular features:
The proponents of this style of trading are considered strong especially for newer traders. This is due to the fact that most newcomers are attracted by fast results and volatile movements.
The particulars of day trading:
- Positions can be opened within one trading day, and then at the end of the day they have to be closed or transferred to the next trading day by placing protective orders;
- All the trades are short-term and are designed solely to capture only a portion of the profits;
- During a single trading day, the day trader can open more than one trade;
- Day trading does not require large investments per trade;
- Generally, day traders operate with the following time-frames: M1, M5, M15, M30, and rarely H1;
- Technical analysis is more important than fundamental analysis. Many day trading strategies are based exclusively on technical analysis.
It is important to pay attention to the pros and cons of day trading:
- It does not require large financial investments.
- A trader can stop trading at any time.
- Minimal risk.
- This style requires solid resistance to stress and tension;
- Intra-day positions require constant monitoring over the course of trading;
- A day trader will need more time to restore his energy and relax.
This trading style is suitable for those who have a strong character and are extremely hardy, have a good response and a stable nervous system.
As a rule, swing trading is for those who are disappointed by day trading. Swing trading does not have such pronounced market movements as day trading. At first glance, it may seem that the market is absolutely motionless.
The particulars of swing trading:
- The position can remain open from one day to 2 weeks or more;
- All the trades are designed to take a large part of the profit from market movements;
- During a week, swing trading can take no more than two positions;
- The investment requirements for swing traders are much higher than for day traders;
- Swing traders operate with H1, H4, and D1 timeframes;
- For swing traders, technical analysis and fundamental analysis are both equally important.
Here are the pros and cons of swing trading:
- The swing trading process is less stressful;
- A significant level of profitability;
- The swing trader doesn’t need to be always present near the terminal.
- The investment requirement is higher than in day trading;
- A trader may get out of the market during a trend correction.
This kind of trading is suitable for traders who have calmer and more thoughtful psychologies. This is especially true in times of market trend formation.
As a general rule, position trading is right only for patient traders. Long-term trading is different from the previous styles due to the fact that the trader experiences minimal stress loads with more free time. Trades conducted with this style can last from several months to several years.
The particulars of position trading:
- The position traders operate with D1 and W1 charts;
- The trading positions can remain open for months;
- The investment requirement is the highest in comparison to swing and day trading;
- Fundamental analysis is more important than technical analysis. Often the latter can be totally ignored.
Here are the pros and cons of long-term or position trading:
- The trader can enjoy his time and focus on other activities;
- The stress and pressure is minimal with position trading;
- The trends are easier to determine and follow;
- The volatility in position trading is minimal.
- The position trader needs a lot of capital to invest;
- The position trader cannot enjoy his profits on a regular basis or frequently withdraw funds based on his trading.
This kind of trading is suitable for traders who have a lot of patience and money. Generally, position trading is associated with professional traders, and you will note that most of the famous investors particularly recommend this trading style.
So, what is right for me?
You should know there is an old debate whether day trading is better than position trading. However, many would agree that the best decision would be to spend your time and money on improving your trading abilities regardless of your selected trading style, because both of them, if properly applied, can generate profits.
Both day traders and position traders are at on opposite extremes, and they have quite different psychologies and opinions on investing. This is why it wouldn’t be right for a professional day trader to force himself to generate profits in position trading and vice versa. Traders, who are very active, are more dynamic, agitated and always nervous to see the results, should choose short-term trading. On the other hand, traders who enjoy sticking to long-term ambitions, enjoy their free time, and maintain patience, can try their skills with position trading.
We should not forget about the deposit potential, as it can help us understand which style to go for. For instance, if your investment potential is only $1000 or $5000, position trading may not be right. You would not be interested in a 20% annual return from such an investment, the swaps may be high, and you can become out of the market. Yet, if you start with $500,000, then position trading makes sense.
So, you may consider the following aspects when picking the trading style:
- Investment potential
- Dedicated time
- Trading experience
- Risk tolerance
What about a combination?
No one ever said that these styles are mutually exclusive. You can combine some of them with great success. Many traders opt for a combination of day trading with swing trading, and they are doing fine.
In conclusion, as you will discover over the course of your trading journey, there may be more trading approaches, but the best one for you is that which suits your psychology.
I hope you will feel comfortable in your preferred trading style!