Types of Stock Trading
Educate yourself in different types of stock trading, so that you can decide upon what to analyze and how to analyse.
The question, what type of stock trader you want to become depends on your understanding of 'yourself' and your knowledge of different types of trading.
Different type of trading demands different types of personality, time availability and capital investment. You have to decide to go with what suits you.
What are different types of stock trading?
Based on duration of stock holding, the different types of stock trading can be classified as:
- Day Trading: It is a type of stock trading where both buying and selling of a financial instrument is done on the same day and all the tradings are closed before the market close for the day. Traders who participate in day trading are called active traders or day traders. Day trading demands fast decision and fast action. This type of stock trading is not advisable for a beginner.
Some of the methods of day trading are:
- Arbitrage: Arbitrage a kind of hedged investment meant to capture slight differences in price. When there is a difference in the price of something on two different markets the arbitrageur simultaneously buys at the lower price and sells at the higher price.
- Market making: Market Makers are appointed by stock exchanges like The New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), NASDAQ Stock Exchange and London Stock Exchange (LSE) to continuously provide ask and bid rates for the brokers to buy and sell the stock in these exchanges.
- Momentum Day trading: It is a method of stock trading, where in a trade is made, when the stock is making a trending movement and the trade is closed at the end of the day.
- Pattern trading: As the stock prices move up and down, they tend to form recognizable recurring designs or figurative diagrams, called chart patterns. Trading these patterns gives us more consistent profitable trades.
- Scalping: It is a technique of trading and profiting in stock market. It is a day trading strategy and focuses on taking very small profits from hundreds of trades. It involves taking quick and small profits, using the ask and bid differences.
- Rebate trading: It is a technique of day trading and profiting in stock market. Here instead of trader paying the commission for buying and selling, he is being paid by the service provider. ECN rebate is the primary source of profit.
- Price action trading: It is a technique of stock trading and profiting in stock market. This is a simplistic and minimalistic approach to trading. This approach considers action of price only, that is open, high, low and close of a time period. The time period can be a minute, five minute, thirty or sixty minute. Some traders consider volume also for decision making, though it is optional. The trade is closed on the same day of opening.
- Swing trading: It is a technique of stock Trading. The trade is taken at the beginning of the price swings and closing at the end of the price swing and on the same day of opening the trade.
- Trading the news (news playing): It is a technique to trade any financial instruments, profiting on price fluctuation, that follows a sensitive news release. The trade is closed on the same day of opening the trade.
- Short Term Trading:A trade period of more than one day to a few weeks is considered as short term trade. A stock is bought and held in position from one day to a few weeks. A short trade is entered by creating a sell position, which is covered by buying after one day or in a few weeks.
Swing trading and pattern trading are examples of short term tradings.
- Medium Term Trading: A trade period from a few weeks to a few months is considered as medium term trade. A trend is followed with tailoring stop loss.
Swing trading with higher time period (for example using weekly bars) and Elliot wave trading are the methods suitable for this types of stock trading.
- Long Term Trading: In this type of stock trading, stock is held for many months to many years. Investment decision is made by fundamental analysis of a stock. Profit from growth of the company, dividends and bonuses attracts this type of stock trading.
Examples of long term trading are Value Investing and Buy and hold method of investing.
“I never attempt to make money on the Stock Market.
I buy on the assumption that they could close the market the next day and not reopen it for five years.”
The types of stock trading may also be classified in relation to a trend as...
- Trend following: Here a trader enters a trade by buying a stock in an up trend or by selling a stock in a down trend, anticipating that the trend will continue. The trade is continued using trailing stop loss, till the trend reverses.
Swing trading, momentum trading, pattern trading and Elliot wave trading, with trailing stop loss, fall under this category of stock trading.
- Contrarian investing: Here a trader enters a trade by selling a stock in an up trend or by buying a stock in a down trend, anticipating that the trend will reverse.
It needs experience to correctly anticipate a trend reversal. Jesse Livermore used to short the market at the peak of an up trend. Value investing is indeed a contrarian investing.
- Range trading: Here a trader enters a trade by buying at the lower level of a range and selling at a higher level of a range, anticipating that the trend continues to remain in a range.
Different types of indicators and support and resistance are studied to trade the ranges.
Some types of stock trading, though may fall under any one of the above classification, a mention has to be made here.
They are investing in IPO, insider trading, electronic trading, futures trading, option trading, emini trading, etf trading, after hours trading, program trading and paper trading.
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