So you hear of traders living the good life and earning lots of money, and you wonder if you could do it as well? Trading as a profession has often been viewed as a job that has a high barrier-of-entry. They say you need to be highly knowledgeable in finance and economics to prosper and earn the big bucks. Truth is – this isn’t really the case at all.
Technically, anyone can be a trader! However, what sets the winners from the losers is the level of discipline and ability to control one’s emotions in the markets.
Say you pool together 100 different traders into a group. Not everyone will have the same trading style. Some are more comfortable with 4 traders per month. Some prefer to trader 4 times a day! While some may choose to put a lower percentage of risk per trader, some are willing to risk more for higher returns!
There is a difference between investing and trading in the markets. For a more detailed elaboration, click here. In layman’s terms, investing involves holding a stock for example, for a longer period of time, hoping that the value increases over several years. This involves analysis on the performance of the business a.k.a. Fundamental analysis.. Trading on the other hand, involves holding the position for a much shorter period. This could range from weeks to just minutes. When trading, focus is put more on the short term movement of the prices based on the market’s emotions.
So in trading, there are three most common types of strategies one can take. These are; day trading, swing trading, and scalping.
- The term day trading is synonymous with trading. As the name suggests, day traders buy and sell a stock within the same day. They usually do no hold a position overnight. Typically, they hold the trade for several hours to aim for a higher expected daily price within the day. It is important that day traders do not fall into the temptation of exiting a trade too soon.
- Swing trading requires a setup where the trader enters and exits a trade over the course of a few days or weeks. Swing traders typically look at charts daily with the goal of looking for opportunities for prices to make major moves over the course of the next few days.
- This trading style is focused on trying to achieve greater profits from small prices changes over a very short period of time. This is more effective in markets that are more volatile. Scalping involves entering and exiting the market in seconds (yes, you read that right), minutes and at maximum, a few hours. In order to really obtain a good profit, scalpers tend to hold larger position sizes. Note that in order to be an effective scalper, your timing and execution must be precise. Second matter very much in this case.
So which trading method is most suited for you?
You need to analyze yourself to find the right answer as it relies heavily on one’s own personality. Remember: in general, one strategy is not better than the other. However, it is important that you know your preferred trading style to be successful in the long run. Why? This is because when your psychology and trade strategy is better aligned, you are likely to achieve more success.
If you are the type of person who wants to spend the end of the day with peace at mind, closing all your positions, then day trading or scalping will be more suited for you. Just close your trades, sit back and enjoy the rest of the evening. However, you must be able to spend most of the day in front of a computer screen with discipline and patience. To add, you must also be able to to put the past in the past. Meaning that if you had a bad trade the day before, just forget about it and focus on today.
On the other hand, if you want to spend less time in front of the screen but only for decisive moments or analysis periods, then swing trading may be more suited for you. You must be comfortable with holding a position overnight and not be too affected by daily adjustments in unrealized profits and losses.
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