That is the question many people ponder before they start seeking alternative ways to earn an income outside of traditional employment; however, there is a big difference between “trading” and “investing”. Both options involve seeking profit in financial markets, but each method pursues that goal in different ways.
For example, traditionally, investors research companies and then buy stocks for the long term with the expectation that the company will grow and the economy will take care of the growth of their portfolio. Trading, on the other hand, can be indeed a full-time job. It requires watching your investments closely and buying and selling more often, sometimes within the course of one day. Traders often focus on a stock’s technical factors rather than a company’s long-term prospects.
If you think you may have an interest in trading, then there are some basic strategies to consider to determine what kind of trader you want to be.
Here are the 4 popular trading methodologies explained.
Perhaps the most common (and well-known) style of trading is day trading. As its name implies, day trading involves buying and selling securities within the same day. In the past, this method of trading was only done by professional traders, but today electronic trading has opened up the doors to more novice traders as well.
A successful day trader knows they need to have an entry strategy and an exit strategy. They also know how to use a variety of different techniques to make predictions, but the most important factor is understanding volatility and liquidity.
Day trading consultant Stefanie Kammerman is the founder of The Stock Whisperer, an online trading education platform where she helps students learn day trading principals or buy one on one online coaching. Online education courses like those provided by The Stock Whisperer can be helpful to traders just starting out in the area.
Position trading is considered to be a buy-and-hold strategy that uses longer-term charts – anywhere from daily to monthly – in combination with other methods to determine the trend of the current market direction. A position trade may last for several days to several weeks, depending on the trend.
According to the Corporate Finance Institute, position trading is the opposite of day trading. Whereas a day trader is more concerned about the short-term drivers of the prices of an asset, a position trader tends to hold onto an investment for a longer period of time with the expectation that it’ll appreciate in value.
Swing trading is the practice of attempting to make a profit from market swings of a minimum of one day and as long as several weeks. While day traders are in and out of the market in one day, swing traders tend to hold on longer before selling.
Swing trader Matt Choi gained his knowledge of the markets through years of experience of trading his own money. Through his trading education company Certus Trading, Matt Choi teaches his students the importance of developing a method of trading that works for them and how to implement those strategies consistently.
Known as one of the fastest strategies applied by active traders, scalping involves exploiting various price gaps caused by bid-ask spreads and order flows. This strategy typically works by making the spread or buying at the bid price and selling at the asking price to receive the difference between the two price points. Scalp traders might be in a position for just minutes. Day traders are focused on the trading day, while swing traders invest for days or weeks.
The bottom line: no matter what type of trader you become, it is important to weigh the risks and costs associated with each strategy. Doing your due diligence will help improve your chances of becoming a successful trader.