If you are a beginner then you would have definitely come across these trading styles. But do you know exactly what these terms mean? How does it work? You can find all the answers to this question in the article – Different types of trading styles in the stock market.
There are three styles of trading that the majority of trades will fall into. These are :
Scalping refers to very short-term trades, anything from a few seconds to a number of minutes. Due to the very fast nature of this trade, analysis is usually done in very small time frames. That is 1 minute, 2 minute, and 5-minute charts. These trades also tend to have smaller profit targets in terms of points or pips than longer-term trades due to their duration. This is obviously because price doesn’t tend to move that far within a very short period of time.
A typical number of points can be estimated by looking at the Average True Range (ATR) of the 1, 2, or 5-minute time frames on the markets the scalping trades are taken. Because the trades tend to be smaller, the goal from a scalping trader’s point of view is to take lots of trades with small risks and a small reward. This means that within a typical trading day, a scalping trader will look to take a good number of trades.
For this reason, a scalper must keep their risk low as it’s easy to see how quickly you could become emotional when trading this frequently within small intervals. As you may have already guessed, the commissions or spreads on trades taken don’t become any smaller just because the trade duration is very small. So a scalper has to be very precise with their entries and exits as small mistakes can have a large effect on their performance.
Day trading refers to trades that are typically opened and closed within a day. These trades typically last anywhere from 15 minutes to a number of hours. The analysis for these trades is usually done on the 30 min, 1 hour, and 4 hour time frames. These trades tend to have larger targets than when scalping as typically a trader will look to take advantage of one of the main moves a market makes within that day.
Using the ATR again is a good way to gauge how large the moves targeted by this style may be on the markets you are looking at. As the trades take longer to set up and play out compared to scalping, the frequency of these trades is lower. On average a day trader may take between 2-10 trades per week and so they tend to risk a little more on each trade than a scalper would, somewhere between 0.5% – 2% is the amount I would recommend.
Entries and exits can also be a little less precise than when scalping as typically a day trade won’t be as impacted by small mistakes. That said, I think it is good practice to have precise entry and exit techniques when day trading to maximize your profitability. This is the second style in the list of Different types of trading styles in the stock market.
Swing trades can typically last anywhere from a day to a number of months or even longer in some cases. Analysis for these trades tends to be on the daily, weekly, and monthly timeframes. Due to the extended time frame of this trade, the targets tend to be significantly larger than those targeted by the previous two styles. And so as mentioned before, looking at the ATRs on the daily, weekly, and monthly time frames of the markets you are looking at will give you a good gauge of how large can moves will be. The entries and exits on swing trades can be less precise as the trade typically takes place over a much larger price range.
For example, if you missed your entry by 5 points on a swing trade, it probably won’t matter too much as the target is likely to be 50, 100, 200 points plus in size. Therefore a small mistake on the entry has a relatively small impact on the risk and reward of that trade.
How do I know what style I should use?
And so you may be thinking, well how do I know what style I should use? And this comes down to a couple of factors.
The first factor is your personality, you may be someone who likes a lot of time to approach the markets and so scalping is probably not for you. Or the opposite, you may struggle to hold on to trades for a prolonged period of time and so swing trading may not be for you.
The second factor is your lifestyle. You may not have the time available to day trade and so scalping where you can sit down for an hour or two may be more suitable. Or even swing trading by looking at the markets for a short period on time on a morning and evening may suit. You may not know which one suits you best yet. You don’t necessarily have to fit into one style, you may have different strategies that fall into different styles and some traders like to take this approach. I would say that is something that comes with more and more experience.
Relatable – Top 10 Best Stock Market In The World 2021
Trading doesn’t work overnight. It takes a lot of effort and patience. So before you take any decision, do your research and learn the basics of trading and then start investing. I hope this article- “Different types of trading styles in the stock market” will help you to understand the different types of trading which will help you to invest wisely.