Many people who become interested in trading are first introduced to the financial markets through investing.The purpose of investing is to build wealth slowly over time, and this is typically accomplished through a buy-and-hold approach: making investments – such as in a stock, ETF or mutual fund – and allowing price to fluctuate over time. Investors “ride out” the inevitable downtrends with the expectation that prices will eventually rebound and rise over the long-term.
After years or decades, the investment will, in many cases, increase in value and provide positive returns for the investor. Long-term returns can be further amplified by compounding through the reinvestment of profits and dividends. Investments are often viewed as a means of building wealth to provide stability and income during the retirement years.
Trading Time Frames
Where investments are typically held for a period of years or even decades, traders buy and sell stocks, commodities, currency pairs and various other investment vehicles with the intention of generating returns that outperform a buy-and-hold strategy. Trading profits are viewed as income since profits are “taken off the table” on a regular basis (as opposed to investing, where positions are generally left alone for the long haul).
Trading profits are achieved through buying low and selling high - and selling high and buying (to cover) low, in the case of short selling - and all trades are entered and exited within a relatively short period of time. This time period can vary from a few seconds to months or even years, depending on the trader’s style. The following chart lists the four primary trading styles - position, swing, day and scalp - with the corresponding time frames and holding periods for each.
|Trading Style||Time Frame||Holding Period|
|Position Trading||Long Term||Months to years|
|Swing Trading||Short Term||Days to weeks|
|Day Trading||Short term||Day only - no overnight positions|
|Scalp Trading||Very short term||Seconds to minutes - no overnight positions|
Position trading encompasses the longest trading time frame, and trades generally span a period of months to years. Position traders may use a combination of technical and fundamental analysis to make trading decisions, and often refer to weekly and monthly price charts when evaluating the markets. Typically, short-term price fluctuations are ignored in favor of identifying and profiting from longer-term trends. This style of trading most closely resembles investing; however, while buy-and-hold investing typically involves long trades only (profiting from a rising market), position traders may utilize both long and short trading strategies.
Swing trading refers to a style of trading in which positions are held for a period of days or weeks in an attempt to capture short-term market moves. In general, swing traders rely on technical analysis and price action to determine profitable trade entry and exit points, paying less attention to the fundamentals. Trades are exited when a previously established profit target is reached, when the trade is stopped out (moves a certain amount in the wrong direction) or after a set amount of time has elapsed. Because swing trading takes place over a period of days to weeks (with an average of one to four days), this trading style does not necessarily require constant monitoring. As such, traders who are unable to monitor their positions throughout each trading session often gravitate toward this popular trading style.
Day trading refers to a style of trading in which positions are entered and exited on the same day. Unlike position and swing traders, a day trader does not hold any positions overnight, and all trades are closed by the end of the trading session using a profit target, stop loss or time exit (such as an end-of-day exit). Day traders typically use technical analysis to find and exploit intraday price fluctuations, viewing intraday price charts with minute, tick and/or volume based charting intervals. Because trades are held for a period of minutes to hours, large price moves are uncommon, so day traders rely on frequent small gains to build profits. To leverage their buying power, day traders usually trade with margin. Day trading is a full-time job since positions have to be constantly monitored and traders need to be immediately aware of any interruptions to the technology chain (for example, a lost Internet connection or a trading platform issue).
Scalp trading is an extremely active form of day trading that involves frequent buying and selling throughout the trading session. Scalp traders target the smallest intraday price movements and rely on frequent and very small gains to build profits. Profit targets and stops are used to manage positions that are generally held for a period of seconds to minutes. Because gains are small on any one trade, scalpers may place dozens or even hundreds of trades each trading session; as a result, it's imperative that scalpers have access to low trading commissions. It should be noted that scalp trading is considered very risky because it relies on having a high percentage of winning trades. And because the average winning trade is generally many times smaller than the average losing trade, it can take just one or two losing trades to wipe out all of your profits profits. Precision is paramount with this style of trading, and scalping requires constant attention to the markets.
High Frequency Trading
One other style of trading that we'll mention here is high-frequency trading (HFT). These traders use complex (and typically proprietary) algorithms to analyze multiple markets and execute orders based on market conditions. Because the traders who have the fastest execution speeds are the most profitable, independent traders trading from home simply cannot complete; as such, they stay away from this style of trading.
The book Flash Boys: A Wall Street Revolt, written by Michael Lewis, focused on the rise of HFT in the U.S. equities market. The book highlighted high-frequency traders' need for speed, and described a $300 million cable project to connect the financial markets of Chicago and New York that would shave 4 milliseconds off a trade. Today, just three years after Lewis's 2014 book, many HFT firms are struggling or have closed shop, citing as reasons a lack of volatility, stiffer competition and new trading rules - including the NYSE's "speed bump" designed to slow down HFT traders.
Which Style Are You?
As a trader, you must consider a variety of factors when determine the trading style that suits you best, including:
- Account size
- Amount of time that can be dedicated to trading
- Level of trading experience
- Risk tolerance
In general, there is an inverse relationship between trading time frame and the amount of time you have to devote to the markets. For example, position traders may be able to spend a couple hours each week evaluating and managing trades. Scalp trading, on the other hand, is a full-time job and these traders spend every minute of every trading session actively managing trades.
Many market participants - whether investors or traders - do not fit neatly into any one category. For example, many traders are also long-term investors, while others may primarily day trade with a few swing trades mixed in. In general, it takes time and experience to figure out the style of trading that will work best for you.
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