What are the different types of trades with stocks? What if I told you the greatest risk isn’t placing a trade at the wrong time or picking the wrong stock? Surprisingly, the greatest danger of all is not being in the market.
And in the words of Wayne Gretzky, the famous Canadian Hockey Hall of Famer, “You miss one hundred percent of the shots you don’t take.” Please, don’t be the person sitting on the sidelines because you’re wary of the market.
- Here are the different types of trades in the stock market:
- Day trading: buying and selling stocks intraday within the same day
- Scalping: buying and selling stocks within a couple minutes
- Swing trading: buying and selling stocks within a few days to a few weeks
- Long term trading: buying and selling stocks within a few months or longer
Stock market trading is something that can be quite polarizing. In fact, many people view it as gambling or a get rich quick scheme. However, it’s not.
There are many ways to trade the market. You have to pick the best way for you. In fact, you may find that you’re more of a swing trader than a day trader.
You may prefer options to stocks. There isn’t a right or wrong trading style. But there are right and wrong ways to trade.
Active Trading and You
You’ve probably already done a google search about trading stocks and had about 3.6 million hits. I know this because that’s what I just did.
In fact, my search resulted in 3,670,000,000 results. But you’re in luck. I’m going to weed through all this mess and narrow down four of the most popular active trading strategies.
First things first, what is active trading? Not to be cheeky, but it’s the opposite of passive trading. I’m almost 99% certain you participate in some form of passive investing, whether it be through your employer’s pension or 401K plan.
You’re in it for the long haul, think 30 plus years. It’s a set it and forget it approach. Whereas with active trading, your time-frame is much, much shorter.
You buy and sell stocks over weeks, days or even minutes — your end goal: to quickly make money from the short-term swings in price movements.
And how do you do this? You have four approaches to capitalize on price swings, which are as follows:
- Day Trading
- Position Trading
- Swing Trading
- Scalping (keep an eye on vwap)
If the number of google hits was any indication of the popularity of day trading, I don’t know what is. The message is clear: day trading is the most popular active trading style out there.
And it’s popular for a reason: taking advantage of small price moves can be a lucrative game — if you play it right. All of your trades happen in one trading day; you do not hold any stocks overnight. In other words, any stock you purchase during the day you sell by market close.
I don’t want to rain on your parade but with the potential for huge profits comes the potential for big losses. That is if you don’t properly manage risk.
Risk management has many names. You will find it called money management, bet sizing, or even position sizing. You want to live to trade another day.
The rules are simple, don’t risk more than 2% of your account size. It is always better to bet a small amount initially on any trade-in case you are wrong – which can easily be greater than 50% of the time.
Because, at the end of the day, it is better to risk-taking many small losses than to risk missing one large profit.
Check out our live trading rooms if you want to see us teach and trade the markets.
A position trader is one who holds a stock position for an extended period – think several weeks to years. Position traders are more concerned with the long-term performance of an asset.
From this perspective, the traders are closer to long-term investors. Other than the “buy and hold” investing strategy, it has is the longest holding time.
Without a doubt, position trading is pretty much the opposite of day trading. With day trading, one is concerned with the short-term drivers of the price (i.e. catalysts). Whereas with position trading, your goal is to identify longer-term price and market trends and earn profits from such trends.
Generally, position trading may provide lucrative returns that will not be erased by high transaction costs. If you haven’t figured it out yet, commissions can zap profits in day trading.
A position trader also uses charts with more extended time frames – think daily to monthly, unlike day traders who use time frames as small as 1 minute.
In the case of day trading where you exit positions daily, swing traders hold positions anywhere from two to six days, or as long as two weeks. The goal of swing trading is to identify the overall trend and then capture gains with swing trading within that trend.
When a trend breaks, swing traders swoop in to join the action. Typically when a trend ends, there is price volatility as the new trend tries to establish itself. Once this price volatility sets in, swing traders buy or sell.
With day trading, we rely on the technicals to tell us when to enter. But with swing trading, the rules for entry are different – there is a strong focus on the fundamentals.
Personally, what I like about swing trading is that I don’t need to be exact and time my entries and exits perfectly. As long as I can realistically predict a market move one way or another, I should be in a good spot.
On the flip side, a range-bound or sideways market is a risk for swing traders. Check out our stock watch lists for possible swing trades.
Scalping is perhaps the most lucrative and emotionally driven form of trading there is. A scalper tries to make as many small profits as possible by exploiting the price gaps caused by bid-ask spreads.
A successful scalper has a much higher ratio of winning trades than losing ones, with profits roughly equal or slightly bigger than losses.
Instead of buying and holding over the long term, scalpers strike fast. They are in and out of a position before we even get a chance to drink our morning latte. As you can see, this approach is the opposite of the “let your profits run” mindset.
Additionally, scalpers are not looking for the home run trades. They don’t want to exploit significant moves – a 10 cent difference will do. And why?
Because it is easier for a stock to make a 10 cent move than it is to make a $1 move. In 1000 size stock lots, buying and selling with a 10 cent gap, the profits can add up quickly.
Further to this, many will repeatedly trade the same stock spread in one day, over and over, capitalizing on the bid/ask spreads.
A quick word of caution, one needs to have strict entry and exit criteria because one massive loss could wipe out all your gains in one fell swoop.
What’s more, the right tools such as a live feed, hotkeys, a direct-access broker and nerves of steel are required to be successful with this strategy.
If you’re a beginner trader, don’t fret. The Bullish Bears will equip you with an understanding of where to start, how to start, what to expect from the different types of trades and how you can develop your strategy.
You can’t win by sitting on the bench; you have to be in the game. So grab the bull by the horns and tackle the stock market with us today.
If you need more help, take our trading courses.