A Beginner’s Guide to Types and Strategies of Trading

There are many reasons why people are now interested in getting into the financial market. Mainly because the rapid advancement of technology has made it easier for everyone to profit off the potentially lucrative field. However, even those with only a passing interest in the market knowing full well how wide the scope is with investing and trading in the financial market. Investing and trading by themselves are two different genres that each have their categories and types.

If you have decided to choose trading over investing, you might be wondering what type of trading is best suited for you. After all, the different types of trading are quite distinct and offer their advantages and disadvantages. You need to be cautious as to what style of trading to go for if you want to experience success in the financial market. Trading is far from simple and easy and you, the trader, need to be able to play to your strengths and that all starts with choosing the right type of trading

But first, let us start with explaining what trading is and what each type of trading have in common. There are three characteristics that all trading types share, namely:

Short-term

Unlike in investing where you hold on to a certain financial instrument for years, sometimes even decades, trading only lets you keep these assets for a comparatively short period. Depending on the type of trading, you could be holding on to assets for a day, several days, maybe even weeks.

Higher risks

While both investing and trading offer a degree of risks, trading is more prone to have higher risks. However, trading also offers more opportunities and higher potential returns. Since prices for financial instruments tend to go high and low in short amounts of time, traders expect more risks in their transactions.

Capital Growth

Essentially, traders look at the price movement, and if prices go higher, traders can sell their financial instruments. This way, traders are in a more favorable position of growing their capital in a shorter period.

The bottom line is that to be a trader you need to have the skill of timing the market and learning trends to hit higher profits in the stipulated time. Traders need to buy and sell commodities, stocks quickly, and other financial instruments, otherwise, they might miss the right time which could lead to major losses.

The main goal of traders is to generate returns that outperform buy-and-hold investing. Traders take advantage of rising and falling markets. With the right strategy, traders can expect at least a 10% return each month, compared to investors who get 10 to 15% return every year. Traders can trade in just about any financial instrument from stocks, options, forex, even cryptocurrency. Some traders pursue cryptocurrency investing via trading bots.

In this article, we will be talking about the two most common trading types right now: day trading and swing trading. A lot has been said about the two, so we will give you a thorough explanation as to their strengths and weaknesses. Traders usually choose their trading type based on several factors such as their trading account size, trading experience, a time they can allocate to trading, personal temperament, and tolerance to risks.

A trading style means the holding period in which a chosen financial instrument is bought and sold. For first-time traders, you’ll need to know what makes either type distinct, the pros and cons, and other details to be able to choose which type is the most ideal for you.

Day Trading

Probably the more popular of the two, day trading means you buy and sell financial securities in one day. There are no overnight positions. Way back then, only select professional traders were capable of day trading since it required access to advanced technology. Nowadays, anyone can engage in day trading.

Day traders aim for prices in the market to fluctuate in value during the day so they can earn quick profits. In day trading, you can hold on to your securities for as short as a few mere seconds to a few hours. However, no matter for how long or how short day traders choose to hold on to their financial instruments, they must always square off all of their assets before the day ends.

To be able to take advantage of their buying power, day traders often trade with margin, which is to say borrowed money. While this does mean that day traders can trade with more money, this also increases the risk of losing more and of putting you in debt. It is one of day trading’s disadvantages, but we will get to that in a moment.

Moreover, unlike other trading types, day trading is a full-time job since positions in the marketplace need to be constantly monitored.

Typically, day traders make use of high amounts of leverage, short-term trading strategies, and sophisticated charting systems to make a profit on small price movements in highly liquid stocks or currencies. Day trading is most common in the stock market and the foreign exchange market, though it can be done in any other marketplace.

Common Misconceptions

While day trading is one of the more popular types of trading, it is also the most misunderstood. It has a notorious reputation of being a suspicious get-rich-quick scheme. Unfortunately, numerous internet scams have pushed this misconception so much so that the media frames day trading as something to be suspicious of.

Even professional money managers and financial advisors have advised against day trading, citing that the rewards do not justify the risks. However, professional day traders (those who make a successful living off day trading) argue that you can still profit despite the risks. They do admit that day trading is incredibly complex and require a certain level of skill from the individual trader as well as an in-depth understanding of the market.

Day Trading’s complexity, demands, and high risks not for everyone. Indeed, those that are capable of flourishing in day trading have to have a unique set of skills as well as access to a reliable internet connection and elaborate PC setups.

That being said, it also can’t be denied that there have been some successful day traders that managed to capitalize off the risks of trading. And if you believe that day trading is for you, you need to be aware of what you are getting yourself into.

Advantages of Day Trading

Independence 

We mentioned earlier that day trading is a full-time job. Fortunately for you, it is a full-time job where you can be your boss. The day trader typically works alone, without a huge and demanding company looming over his shoulder day after day. There are some serious perks to being your boss. For one thing, you will never be late for your shift, and you can even decide which day you will come in. Your work environment is casual so you can work at your own pace without pressure. And you definitely will not ever have to worry about clashing heads with the higher-ups because you are wholly independent.

Job Requirements

Unlike pretty much most of the jobs related to finance, day trading does not have strict job requirements. You do not need a degree from a prestigious university or a certain number of years of experience in a related field. While there are online courses that can seriously help you learn the intricate details of day trading, they are not a prerequisite to enter the field. Though it would be helpful if you are knowledgeable enough about day trading so you will not suffer financially.

Higher Risks, Higher Rewards

While day trading is infamous for its risks, it is primary appeal has always been its potential to make substantial profits in a short amount of time. You might be taking more risks, but you are opening yourself to the probability of getting higher profits.

Thrilling and Exciting

Because of the rapid-fire nature of day trading, traders often find that there is never a dull moment in their day. There is always a rush to make decisions that could make or break their account. For professional day traders, the thrill and excitement of day trading can be addictive.

Disadvantages of Day Trading

Higher Losses

Usually, day traders suffer substantial financial losses in their first three months of trading, and only a select few individuals can even make enough profit to consider continuing the trade. Day trading is cutthroat, and if you are not careful, you might dig yourself deeper and deeper in debt, especially since a lot of traders trade with borrowed money and not their own. Inexperienced traders will not know what will hit them when the market shifts and they find their margin depleting. There is a reason why budding day traders are cautioned to always do their research before jumping into the market.

Inconsistent Pay

Being your boss has its share of drawbacks too. Primarily, you do not get a consistent paycheck every month since a day trader solely relies on his skills to earn a profit.

High-Stress Job

Unless you are the type to enjoy the constant excitement and unpredictability that comes with the job, day trading is going to drain you of energy big time. It is a field that is extremely stressful since traders always have to gamble a certain amount of money based on a split second decision.

Start-up and Maintenance Costs

The average day trader has to compete with a lot of professionals every time they trade. That is why day traders have no choice but to spend a lot of money on a trading set-up and software, not to mention paying to see live price quotes and commission expenses.

Swing Trading

While day trading is a short-term trading strategy, swing trading is considered a medium-term trading strategy where traders hold securities for a day to a week. Swing trading attempts to capture short-term market moves relying more on technical analysis and price action to find a profitable trade entry and exit positions rather than fundamental analysis.

The gist of swing trading is to set up trades on “swings” to highs and lows over an extended period, to filter out erratic pace movements in the market (which day traders have to deal with). Swing trades are also to avoid narrowly placed stop losses.

Swing traders typically rely on larger frame charts like weekly charts, daily charts, even 60-minute and 15-minute charts. This is because swing trading needs careful position sizing and traders look for multi-day chart patterns to exploit. Key reversal candlesticks are also usually used to devise a good swing trading plan. The stop-losses are often wider in swing trading to equal the proportionate profit target.

One of the main differences between swing trading and day trading is the number of time traders has to dedicate to trading. Day trading demands full-time attention. However, swing trading is not as grueling. Because swing traders hold their securities for a period of a few days to a week, it does not require constant monitoring and attention. You can hold a full-time or part-time job while swing trading, which makes this type of trading particularly popular to people unable to constantly monitor their positions during each trading session.

Swing trading also does not have the same stigma that day trading has. It still has its risks – all types of trading and investing have some degree of risks – but not of the same gravity as in day trading.

Advantages of Swing Trading

Does not Require Your Full Commitment 

As mentioned earlier, swing trading’s main advantage over day trading is that it is not as taxing as day trading. Swing trading does not have to be your full-time job so anyone with the right knowledge and resources can get into it. The longer time frame swing trading offers is appealing to a lot of people, especially those not yet ready or sure about trading for a living.

Fewer Trading Tools Required

You can think of swing trading as a simpler and more casual version of day trading. While day traders have to have state-of-the-art tech and software, swing trading can be done with just a simple computer with the right trading programs. You do not have to spend so much on the latest technology to engage in swing trading.

The potential for Higher Profits

In general, trades need time to work out, that is why swing trading is so advantageous since leaving a trade open for a few days (or weeks) might result in higher profits. It gives traders much more opportunities than simply trading in and out of securities several times in one day. Moreover, swing traders typically do not rely on margin, so they are not at the risk of falling in debt.

Less Stressful

Due to the very design of swing trading, it is not nearly as stressful as day trading which people can benefit from. The chances of you suffering a burnout because of the stress are unlikely.

Disadvantages of Swing Trading

Potential Risks

Of course, like every type or style of trading, swing trading comes with a risk. The trader stands to lose a substantial amount each time he trades. Swing traders hold their trades longer than day traders, so it stands to reason that they are more prone to larger losses.

Inconsistent Pay

Like with day trading, swing trading – especially at the beginning – is not going to generate a steady income. It might take some time to gain back your capital. However, so long as you have a stable job outside of swing trading, you will not be in too much trouble.

Lack of Focus and Thrill

This will not be a problem for those who are still on the fence about trading, but for those looking to get seriously into the market, swing trading does not offer much of a challenge. In a way, compared to the adrenaline rush of day trading, swing trading can seem a little boring and unfocused. Not for someone who craves the thrill of the rush, the addicting element of day trading.

Day Trading vs. Swing Trading: The Verdict

Ultimately, there is no conclusively better type of trade. It all depends on the trader, their preference and their dedication to getting into the financial market. If you want to make a full-time job out of trading, day trading is the way to go. But if you prefer to start with something more casual to get a feel of trading, swing trading will be more suited to you. Whichever trading type you choose, you will need to do ample research and preparation to make sure your trading venture will not go awry.

Trading Strategies: Range Trading vs Macro Trading

Just as there are several types of trading, there are also different strategies of trading. Two of the most common to date are range trading and macro trading.

Range Trading

This trading strategy aims to capitalize on the tendency of prices to revert to the mean. Range traders identify overbought and oversold areas (support and resistance areas, respectively) and purchase the oversold area while selling the overbought areas. Support is the price that a certain asset will likely not fall below while resistance is the price that will likely not surpass. Traders look to identify the ranges created by these levels.

In this manner, ranger traders are mostly focused on technical analysis. By finding the clear support and resistance levels, they can create a channel by connecting a series of high chart points and a series of low chart points. Range traders will then operate only within that range, hence the term.

Once traders have successfully discerned the specific highs and lows, they then attempt to profit off the range by executing certain trades. Normally, range traders repeat the process of buying at support and selling at resistance several times before the chosen financial security breaks out of the channel. When this happens, the security undergoes a substantial movement in the direction of a breakout.

The risk in this trading strategy is the market’s tendency to shift between range expansion and range contraction continually. A price will break out of its boundaries eventually, and if you are not careful, you might keep losing money by only relying on the trading range. Traders have to set up a risk management mechanism to limit losses in the event the market moves in an unexpected direction.

Macro Trading

Macro trading (or fundamental trading) is a trading strategy where individuals attempt to make a profit from patterns in economic data like growth, inflation, and unemployment. The macro trader takes into account company related events before they decide to make a trade.

Macro traders believe that capital markets tend to react to particular domestic or international events in predictable ways. So by understanding relevant events and the potential reactions they can cause, traders can make informed predictions on how prices will move. Macro trading is more on fundamental analysis than technical analysis.

In macro trading, traders gather all the available pertinent financial, internal, and external information about a particular entity. They also examine economic reports and keep an eye on political factors that could affect the financial instrument’s activity. Depending on the security, global affairs could also have an impact on the market.

A good example of using the macro trading strategy is this: say you are trading in the stock market and news breaks out that the company you planned on buying stocks from is caught up in a major scandal. Macro traders will logically hypothesize that the company’s stock price will fall pretty soon, so the trader will act accordingly.

However, macro trading also has its downsides. It has been accused of encouraging a herd mentality where the majority rules. Large groups of traders employing macro trading strategy could affect price movements, and for that reason, this strategy has been criticized.

About Rachel Williamson