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Types of Stock Trading
Educate yourself in different types of stock trading, so that you will 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. Based on duration of stock holding, the different types of stock trading can be classified as:
- Day Trading: 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.
- 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 a stop loss.
Swing trading with higher time period (for example using weekly bars) and Elliot wave trading are the methods suitable for this type 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.” -Warren Buffet.
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 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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