What Trading Style Should You Use?

In my last article, we discussed the four primary styles. Now, how do you decide what style fits you best?

There are several factors that come into play when deciding what trading style works for you. These factors are: the market you choose to trade, the time (or lack of time) you have to commit to trading and, last but far from least, your personality.

Let’s look at each of these components in more detail.

Different trading styles work with different markets. For instance, scalpers typically use the e-mini index futures markets to trade. These markets are extremely fast moving, liquid, have tight bid/ask spreads and often permit surgically precise intuitive or mechanical entries and exits.

The stock market is suited for a variety of styles from day trading to long term investing. In fact, the term “day trading” was initially coined to reflect the stock day trader. Very few can successfully scalp the stock market in the true sense of scalping, but it can be done with specialized software and tactics. But Level II data combined with time/sales tape make the stock market perfect for day trading.

Stock screeners and software analysis tools help make stocks all the more ideal for day trading. Decimilization has taken away much of the stock day traders edge, but the ultra low commissions of today still allow many day traders to thrive trading stocks intraday.

The stock market also lends itself quite readily for swing trading, often in combination with the day trading style where certain positions may be held overnight based on the trader’s analysis and market conditions. The long term upward bias of the stock market makes this market suitable for long term trading/investing, as well.

Day trading can be done in the currency or Forex markets. However the long term trends that develop in these markets make them much better for swing or long term trading. The size of the bid/ask spreads in the Forex pairs makes scalping and day trading difficult although not impossible. I have an associate who successfully runs a retail Forex day trading business despite the need to beat the bid/ask spread. Most traders, however, would be well advised to stick with swing or long term styles when venturing into the Forex market. The EUR/USD is the most popular currency pair with the USD/JPY running a close second.

Putting in Your Trading Time

Next let’s look at the time you have to commit to trading to determine the style that fits you best. The shorter your time frame, the more time you need to commit to it. At first glance this may seem counter intuitive but it makes perfect sense. Scalping and day trading require lots of time sitting in front of the screen in order to profit. There are a miniscule number of part time successful day traders and even fewer profitable part time scalpers. These styles rest primarily in the realm of the full time, professional trader.

On the other hand, professionals do swing trade. But this style is often the domain of the part timer. Those with full time jobs and other commitments but still wish to actively trade are best suited for swing trading. Swing trading allows you to do market analysis in the evening or your spare time and still have a good shot at success.

Long term investing is normally reserved for those with strong macro-economic convictions and/or those who simply want to have a “hands off” approach compared to other, more short term traders.

For instance, a long term trader might see the devaluation of the dollar starting over a year ago, short it and ride the huge trend down that developed over a long term time frame. Another long term trader could also be bullish on certain sectors purchasing ETF’s or mutual funds that mimic these sectors then just let it ride with ultra wide or no stops.

Personality is perhaps the most critical aspect of choosing a trading style. If you crave action, scalping or day trading makes the most sense. The more laid back traders, and those whose nerves are easily frayed, will fit in well with the swing or long term styles.

Trader Know Thyself

Your trading style is directly related to the market traded, time available to commit, and personality type. I divided the styles into Scalping, Day Trading, Swing Trading, and Long Term Trading/Investing with each style being ideal for a certain market, time commitment and personality type.

The key here is knowing yourself and having an understanding of what you enjoy-and where your pain threshold is. If you don’t know intuitively, I suggest trying several styles on a trading simulator or simply paper trade to determine which one fits you best. Choosing the right style is the most important decision you can make in your trading career, do it carefully!

Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.