Successful trading also depends on, if a trading style fits you. When deciding what type of trading style is best for you, ask yourself the following questions:
1. How much time do I wish to commit to trading?
2. What’s my risk tolerance?
3. What strategy makes the most sense for me?
How much time do I want to commit to trading?
a) Short-term/Day trading
When you are a short term or even day trader, you’re in and out of a position within a few days (short term trader) or the same day (day trader). This usually requires you to stay in front of your computer or on your phone during the trading day so you can execute trades all day long. Short-term traders usually exploit strong moves in the market or stock. They’ll typically take smaller but more frequent losses in exchange for more frequent trading opportunities and wins. While trading is more speculative, some risks are eliminated. You can’t get attached to a stock because you’ve held it for a long time or because you believe in the news story surrounding it.
b) Intermediate-term traders typically own stocks for a few weeks or longer. They’re waiting for a story to play out, such as an earnings report, a drug approval or a completed chart pattern. They’ll usually set stops that give the position some room to move. That way, they won’t get shaken out by market noise, but they also won’t suffer too large of a loss if the trade goes against them. Traders who expect to be in trades for a few weeks don’t have to spend as much time tied to their computers.
c) Long term traders, or investors typically hold stocks for months, years or even forever. They look for rock solid investments they can hold over the long term. They take a larger risk, to sit out corrections, crashes or even bear markets. They often add to their positions when the market is “on sale”. They might use stops to protect their portfolio but these stop losses or trailing stops are much wider to sit out bigger market shake outs. Long term traders or investors adjust their portfolio and positions on a regula basis but probably each quarter or even on a yearly basis. Investors do not spend anywhere near as much time as short term or medium term traders.
2. What’s my tolerance for risk?
Traders who stay in positions for several weeks usually give their positions a wider range. That way, normal volatility doesn’t force them to sell too soon. It means they have to be able to tolerate some moves to the downside. Shorter-term traders take smaller losses, but they need to be able to take those losses quickly.
3. What strategy makes the most sense for me?
Do you like to trade based on earnings reports, volatility, charts, valuation, or FDA approvals? Certain catalysts will lend themselves to shorter- or longer-term trading styles. If you like to trade the markets based on volatility, your trades will likely be short term in nature. If you love trading biotech stocks based on upcoming clinical trial data, your trades will have a longer duration.
Sven Franssen