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One of the most crucial questions a new trader can ask themselves is, "How do I start trading stocks? What trading style should I use?"
This question directly relates to how much enjoyment you will obtain from your new trading endeavor. It is also crucial for your long term success to utilize a trading style that fits you.
First let's define the primary trading styles based on time a trade is held. Scalping, Day Trading, Swing Trading, and Long Term Trading are the four main styles. In the second part of this discussion, we'll look at how your personality and trading goals fit with these different trading styles.
Scalping: For Professionals Only
The quickest time frame is ruled by scalpers. These hyperactive video gaming types utilize micro time frames, sometimes trading over 1000 times a day for miniscule profits and losses each trade.
Scalpers are normally tape readers, meaning they are making trading decisions based on order flow. By order flow, I mean the type of stocks that are trading, and the aggressiveness with which traders are trading them as revealed by trading volume, among other factors. Scalpers use a lot of esoteric tools—from Level 2 and depth of markets screens as well as time and sales tables that note every single trade in a given stock. Price charts, which many think are synonymous with stock traders, are usually just too slow for the hard core market scalper.
Examples of good scalping stocks right now are Aflac (AFL | Quote | Chart | News | PowerRating), General Mills (GIS | Quote | Chart | News | PowerRating), US Steel Group (X | Quote | Chart | News | PowerRating), Intermune Pharmaceuticals (ITMN | Quote | Chart | News | PowerRating), and Hudson City Bancorp (HCBK | Quote | Chart | News | PowerRating).
What makes these stocks good scalping trades in the first half of April 2008?
These stocks had the momentum and volume to enable a scalper to get in and out with enough share size for profits without affecting the stock itself much. In other words, any one individual scalping trade will go unnoticed in the stock allowing small moves to be captured without throwing off the stock's existing rhythm and momentum.
The major stock indexes are also very popular among scalp traders. The S&P 500 is often scalp traded by traders using futures contracts such as the e-mini S&P 500. The Dow Jones is also often a popular index to trade, as is the Russell 2000 Index. Both of these indexes also have e-mini futures contracts that traders use to scalp trade these markets.
Day-Trading: Around the Market in a Day
Day trading is the next style in terms of the length of time in a trade. It is a little slower and uses some different tools than scalping. Day trading simply means entering and exiting a trade within the same trading session or day. Scalpers are day traders by definition, however day traders are not scalpers so there is some overlap in the style types.
Day traders look for short term profit opportunities, often on one to five minute charts. The successful day traders generally follow strict entry and exit rules based on price movement or the amount of time in the trade. Most prop or proprietary traders are either true scalpers or day traders. They generally consider the risk too great to hold positions overnight. The high volatility market in late 2007 and early 2008 is just one recent example of the kind of trading environment that can create many great day trading stocks.
The following few stocks have caught my eye as being ideal for this style right now: Teva Pharmaceuticals (TEVA | Quote | Chart | News | PowerRating), Bear Stearns (BSC | Quote | Chart | News | PowerRating) (for the more experienced only!), Google (GOOG | Quote | Chart | News | PowerRating) and last but not least Citibank (C | Quote | Chart | News | PowerRating) (the stock I love to hate).
What makes these stocks particularly good day trading candidates? As of this writing, these stocks are attractive for day traders because the lead market maker in each case, the one who helps make sure that buying and selling in the stocks flows freely, was easy to spot. Additionally, all of these stocks were making moves large enough for traders to catch profits in the middle, as well as having sufficient volume to allow traders to buy or sell the stock without moving the stock too much in the immediate term.
Swing Trading: Trader's Paradise?
Swing trading refers to holding a trade for a minimum of an entire trading session/day and into the next one. The official definition of swing trading is somewhat nebulous, I define it as a trading style of staying in a trade for at least into the next session but no longer than 2 weeks.
Swing trading is well suited for chart reading, technical analysts, and those who prefer active trading but who find the previous two styles are just too fast or require too much time monitoring the screen. Many of the traditional technical analysis indicators were designed to work primarily for the swing trading aficionados.
There are a large number of stocks that can work well for swing trading. I look for large capitalization stocks with strong volume and steady trends like Apple (AAPL | Quote | Chart | News | PowerRating) and Wal-Mart (WMT | Quote | Chart | News | PowerRating).
Long Term Trading: The Old Buy and Hold
Long Term Trading, or simply investing, is just what it sounds like. This style requires one to interpret long term trends and fundamental data in order to make decisions on price appreciation over greater lengths of time such as a year or more.
Technical analysis is used primarily as a way to establish whether the market is in an uptrend or a downtrend. Beyond this, the majority of long term traders and investors use economic data and global trends to determine when to buy and sell. I consider anything held over 2 weeks to be long term. Many trades can be held for years should the anticipated trend continue. Most of the market investing public falls into this category while investing into IRA's, mutual funds and other long term type vehicles, including LEAPS.
These four broadly outline the different types of trading styles available to traders of stocks. Next, we'll take a look at how you can choose from among these different trading styles to find the one that fits best with your personality, available capital and trading goals.
Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.
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