There are a few different styles when it comes to trading and it is important to choose the one that best suits you and your personality type. Here we will look at the 3 top trading styles – day trading, swing trading and momentum trading and discuss the pros and cons of each.
Day trading is a good solution for those who are looking to trade over a short time frame. Day traders tend to look at price movements over minutes, hours or days. While the shorter period of day trading will give traders access to more trading opportunities, this will also require much more regular monitoring of your positions, which some traders could find stressful. Similarly, sudden and volatile price changes which are common with day trading, may be stressful for some traders. Another advantage of day trading is that through the use of technical analysis it is easy to define your stop loss and therefore adjust your risk.
The principle of swing trading is that you trade in the direction of the trend, entering on pullbacks for long positions and rallies for short positions. Swing trading also has a short time frame with a position held for a period of days or weeks. Swing traders tend to use a combination of technical and fundamental analysis. While it has a short term time frame, it is longer than that for day traders and therefore there are less trading opportunities, but higher profit potential. The longer time frame, also makes this a less stressful style of trading as trades are monitored in terms of days, not hours or minutes. One disadvantage of swing trading is that the investment requirements may be higher than day traders face.
Momentum traders will be hoping to profit from sharp price movements, along with high trading volume and it is the high volume of trades that supports the price movements. Momentum traders rely heavily on technical analysis. These trades can have particularly short time frames as traders will be looking to capture explosive price movements. Due to the short term time frames of the trades, the investment per trade may be high, but this trading style can generate the highest return per investment. Because traders are attempting to capture fast changes in direction, this style of trading can be stressful and because you may be trading much larger than usual, strict stop loss and risk management tools must be applied when trading with this style.
No one style is better than another, although different styles will suit different traders better than others. If you enjoy scanning markets regularly, you will enjoy a style with a shorter time frame, but if you find it difficult to keep your emotions in check and to cope with stressful situations, a longer time frame will suit your personality better. The most important thing is to find the trading style that works for you and then to work on optimising your strategy to become successful.