The trading of stock and shares can incorporate lots of different strategies. Each of these can provide you with lots of terminology to understand. In the article below, we break down the main types of traders.
The different strategies and the names used can be baffling when you begin trading. However, trading does not have to be complex. Many investors choose one method and then stick with it for some time. If you are considering becoming a trader, then the article below can help by breaking down the main types of trading.
Day Trading
Day trading is mainly for people who trade for a living. It involves buying and selling stock and shares within a trading day. This timeframe can differ depending on the exchange but is usually a six to eight-hour day. All trades are closed by the end of the day so that prices do not change overnight when traders are not working and their exchange is closed.
When day trading, buyers will open and close positions within days, hours or even seconds. They will make multiple trades in a day and are not concerned with the long-term value. Instead, they are making a profit from the small fluctuations.
This method is an extremely fast way of trading and is not recommended for beginners. Within is a host of strategies and other ways to trade.
Generally, day traders will incorporate a level of technical analysis to look at past historical trends and see what may rise or fall in value. This is combined with momentum trading to see what they can make on short-term gains.
Margin Trading
Margin trading is also known as leveraged trading. It allows you to trade using borrowed money from a broker, which is the leverage. To do this you must use a deposit, which is the margin.
Margin is expressed as a percentage. So if it is 20%, then you will only need to put down 20% of the full trade as a deposit. This lets you make trades with more capital than you have. However, if the market goes the wrong way you can lose money. Different types of trades with varied risk levels will also have different levels of margin.
Swing Trading
This form of trading sits somewhere between day trading and buy-and-hold investing. It involves holding trades for a longer time, usually a few days to a few weeks. This is in the hope that expected changes come, and they can then be cashed out. While this usually results in smaller gains, they can add up over time.
Swing traders will look for patterns in trading activity. They usually look at large-cap stocks as these are the most traded. The danger with this type of trading is that events can cause prices to fall while the exchanges are closed, as they are held overnight or throughout the evenings.
Position Trading
A position trader is a long-term trader, holding for even longer lengths of time than a swing trader. Yet it does not involve holding for as long as a buy-and-hold investor. They emphasize the long-term growth of an asset, earning profit from securities over a period.
Position traders will generally use two methods to identify positions. Fundamental analysis and stock picking are the first. This involves looking at a company’s financial statements and the broader economy. They will then use technical analysis to see how much these can grow and to spot any trend reversals as a possible time to close positions.
This method, like any, does have its drawbacks. Firstly, trend reversals can yield losses. Secondly, it is also not as liquid as other methods. These traders may have assets locked up for a long period.
Buy and Hold Trading
Buy and hold involves opening positions and holding them for the longest period possible. Many will buy them and aim to close them in retirement or much later in life. It is a method praised by many of the world’s most popular investors. These types of investors are not concerned with short-term buy and sell strategies. However, some people are critical as it means these investors do not always sell at the optimal time.
It is one of the most passive forms of investment. This means you don’t have to watch the economy or key tracking changes every day. Thus, it can be very attractive for many people who have little time to devote.
The method that is right for you depends on several factors. Firstly, your level of risk aversion will dictate it. You must then decide how much time you have to trade. Will it be a full-time, day trading occupation? Or would you prefer to be extremely passive and hold for a long time? Knowing your desires and combining them with research and analysis will surely yield positive results.
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