Whether you are starting out your trading career or a professional trader, mastering the art of stock market trading types can be a life-changer for your financial freedom. In this writing, we will go deep into the various kinds of stock market trading and strategies that will help you to succeed in the fluctuating world of stock market. Each trading type whether it is a day trading or swing trading has its unique traits and require a different trading style and mindset. In this article, we will see the advantages and disadvantages of each trading type and the strategies for each trading type for profitable trading. This will helpful whether you want a quick buck or wanted to build a long-term investment portfolio. You will get the confidence and knowledge by understanding these trading types and strategies. So, fasten your seat belt so that we may start journey for unveiling the secrets of mastering the art of stock market trading.
Stock Market Trading Types
There are several kinds of trading approaches when it comes to stock market trading types. Each type of trading has its pros and cons and the type of strategy that work. So, it is essential to understands the characteristics for each trading type so that you can choose what most suited to your personality, mindset and trading style.
1. Scalping Trading Strategy
This is a basic kind of stock market trading types that take advantages of the small price movements and traders take multiples trades throughout the day. So, at the end of the profitable day, the sum of the profits makes a reasonable amount. Traders who follow this approach take very small profits on a single trade by buying and selling within minutes of seconds. Scalping requires a sharp mindset, discipline and high level of focus as the traders have to make very quick decisions within seconds. Scalping is not favorable for those traders who do not have time to sit in front of the screen throughout the day. This strategy requires a significant amount of time and focus to monitor the trading screen closely throughout the trading time.
2. Day Trading Strategy
Day trading is the most famous form of stock market trading types that has higher time frame than that of scalping. It involves buying and selling the stock within the same trading day. Like scalpers, day traders also try to take advantages of small price movements. The day traders typically close all of their trading positions at the end of the day. Day trading also requires traders act quickly and deep understanding of technical analysis. The day traders also focus on the best times of the day for taking the positions and exiting the trading positions. The day traders deal with the quick fluctuations of the market. Higher risk involves in day trading but it also comes with highly profitable opportunities as compared to other trading styles.
3. Swing Trading Strategy
Swing trading strategy has the higher time frame than that of day trading in stock market trading types. Swing trades focuses to take advantages from the medium-term price movements. These traders can hold their trading positions from a couple of day to few weeks and try a capture a complete swing of the price movement. Swing trades use technical analysis and other chart patterns to identify whether the market is trending or not and what is the direction of the trend so that they can ride a full swing. With the help of technical analysis, they also identify possible entry and exit points. Swing trading involves patience and the mindset to withstand the small price fluctuations.
4. Position Trading Strategy
Position trading strategy is the long-term trading strategy in which the traders hold their trading positions for weeks, month or even years. Position traders make their decisions on the basis of fundamental analysis and see the overall performance of the organization. These traders try to capture the major market trend. Position traders require higher level of patience and longer-term approach. These traders should have the capacity to bear the market volatility and do not get destabilize with small price fluctuations. This strategy is famous for investors who wanted to build long-term investment portfolio.
5. Trend Following Trading Strategy
In trend following trading strategy, traders aim to capture sustained market trends. Trend followers first identify the direction of the overall market. Then they identify the direction of the stock trend under study and enter the trade when align with the major trend. Trend followers also use technical analysis like moving averages to identify the trend direction and average directional index to measure the trend strength. They also use technical indicators to identify the potential entry and exit points. Trend following strategy can be highly profitable if implemented properly. This strategy requires a high level of disciple and the ability to stick to the trading plan.
6. Breakout Trading Strategy
In breakout trading strategy, traders take position when the price breaks out from the defined boundaries of support and resistance. As the stock breaks out from a defined level, it is assumed that they will cover a significant distance. Hence, traders enter at breakout level to capture the profits from the market momentum. Breakout traders identify the possible break outs and confirm it with the help of technical indicators. Extra confirmation can be done with the help of pull backs and retest the previous level. Identifying the right break out is also essential to save oneself from the false breakout. In false breakouts, the price usually moves back to range and in extreme cases, moves in the opposite direction thus trapping the retail investors. So, breakout trading required the disciple and capacity to identify the key support and resistance areas and the ability to react quickly as the price breaks these levels.
7. Range Trading Strategy
Range trading strategy is the opposite of breakout trading strategy in stock market trading types. In this strategy trades go for those stocks who follow the support and resistance area and reverse their direction after hitting them. In this strategy, trades buy when the price reverse after hitting the support zone and sell when the price reverse after hitting the resistance zone. We call it zones because support and resistance are not the most specific line instead these are the zones from where the price is expected to return. For range traders, it is essential to have the ability to identify the possible support and resistance levels and the capacity to make accurate predictions about reversal at these levels.
Technical analysis in Stock Market Trading
In technical analysis, traded analyze the movement of stock price with the help of statistical data and historical price of the stock. Traders who use technical analysis believe that price movement remains consistent over a period of time. They believe that the historical data of price is helpful in predicting the future price movements of a stock price. In technical analysis, traders use various tools and indicators to predict the price movements. Some of these tools includes moving average, trend lines, moving average convergence divergence (MACD), relative strength index (RSI), and average directional index (ADX). With the help of these indicators, traders can identify the direction of the trend and potential entry and exit points. It is worth mentioning here that technical analysis only provide idea for future price movement which may not be 100% correct. Use other indicators, chart patterns and risk management strategies to trade profitably in the stock market.
Fundamental analysis in stock Market Trading types
In fundamental analysis, traders analyze the stock based on its intrinsic value and see which stock market trading types best suits them. Traders use different kinds of financial statement analysis to determine the true price of the stock. Some of these analyses include balance sheet analysis, income statement, cash flow statements etc. along with this ratio analysis, they look for industry trend, management capacity, new product launches and other macro-economic factors. If the stock price is under value, then they go for long position in the stock and if the stock price is overvalued, they go for short position. Fundamental analyses are normally used by position traders who take position for a longer period of time. The fundamental analysis tells us which stock should buy and which stock should not. On the other hand, technical analysis tells us when to buy a stock and when to exit the trade.
Risk Management in Stock Market Trading types
Managing risk is the most essential part of stock market trading. Trades who cannot manage their risk effectively in stock market trading usually lose money too early. It is essential to have a clear risk management plan ahead before taking trades in the stock market. The most common risk management strategies include setting stop loss order, proper position sizing and diversification in the portfolio. The stop loss helps to exit the trading position automatically after a defined bearable loss if the trade does not go in our favor. Proper position sizing helps to avoid losing too much in a single trade by allocating a pre-determined percentage of capital for a single trade. Diversification includes the investing in number of stocks so that the loss of one can be managed with the profit from the other stocks. Losing trades is a part of the game that can never be avoided. Take it as a cost of doing business and manage it with the help of risk management strategies.
Choosing the Right Trading Strategy for you
Every individual has unique personality, unique trading mindset, different risk tolerance level, different trading goals and the time available for trading. So, the right trading strategy that meets the individual needs depends on all these factors. It is important to have a trading strategy that align with your trading goals, trading style and risk tolerance level. Choosing the right trading strategy starts with self-analysis and self-evaluation. It is also essential that keep on educating yourself with the latest trend of the market that will help to improve your trading mindset and trading style. It is important to mention here that with one strategy one trader may make money and with the same strategy the other trader may lose money. It is because the strategy is aligned with the first trader personality and not with the second trader. So, one size does not fit for all and you have to work on developing your own trading strategy.
Resources for Learning Stock Market Trading
Continuously educating oneself is extremely important for consistent success in the stock market. if you are beginner in the stock market trading than there are several resources available like this website that will help you to build your knowledgebase. Different kinds of books and webinars are available which will provide you the deep insights with the trading world. Some of these books include, how to make money in stock market, reminiscences of a stock operator, the disciplines trader etc. Along with these books, different kinds of online forums are also available where traders share their trading idea and help each other to be a better trader. Additionally, before going into real market, do a demo trade for some times and check your trading strategies on historical data. This will not only validate your trading strategy but also help you to gain confidence in trading.
Mastering the art of stock market trading is not a game of single day or week. It develops with the passage of time. It requires patience, disciplines and continuous learning and updating your trading strategies. With the help of different kinds of trading strategies discuss above, you can make better trading decision that will improve your chances of success. Now, it depends on you whether you want to be a scaler, day trader, swing trader or position trader. Do you self -analysis and choose the trading type that most suits your personality and the availability of time dedicated for trading purposes. Remember that there is no short cut for making quick money in the stock market or being an expert trader. Success only comes to those who show commitment in terms of time and energy for the trading cause. So, select a single trading type, learn it, plan the customized trading plan and stick to it. Stay focused on your trading journey and may the markets be ever in your favor!