It might come as a surprise to those that are just getting started in the trading world, but there are quite a few different types of trading and many unique strategies. Once you realize this, it can get confusing quickly. You may choose to research these strategies and test them yourself, or you may benefit from reaching out to a professional like Jared Martinez of Market Traders Institute. If you wanted to, you could do both.
Regardless of what you decide, you need to at least have a basic understanding of some of the trading types before putting your money where your curiosity is. With that being the case, here is information on several different trading types, including their pros and cons.
The first type of trading is called day trading. This type of trading is one of the most popular and many people start out here. The way it works is that you buy and sell in one day without holding any type of position overnight. While the trader can hold the position for minutes or hours, all trades are closed out before the market closes. This type of trading takes a lot of dedication, learning and discipline. It’s common to go through several trades in one day.
- It requires a minimal investment.
- You can earn substantial gains.
- It’s easy to get started.
- It has high risk.
- It can get quite expensive.
- Trades must be completed in just one day.
With limit trading, you’re able to limit the maximum amount you pay or the minimum amount you’ll accept when you buy or sell stocks. For example, say you want to buy 40 shares in a business whose current price is $60 per share. You can decide you don’t want to pay more than $55 per share. If the share’s price dips down to your predetermined threshold, then you’ll automatically be able to buy the 40 shares. However, if it doesn’t, then no purchase will be made.
- You can have precise control.
- You don’t have to overpay.
- The stocks you want might never get to the price you want to pay.
- You may miss out on a large return because your buy price was specified a few cents too low to capitalize on a swing in price.
Most of the time, when you want to buy a lot of stocks from a certain company, your broker will put orders in as they become available. This is usually over the course of days or weeks. They do this so you aren’t flooding the market with a huge order. Sometimes, though, people want to buy all the stocks at a certain price. This is called an all-or-nothing trade. This basically means you don’t want to buy the stocks unless they can all be purchased together.
- You’ll get all of your stocks for the same price.
- You won’t have to worry about the price rising unexpectedly.
- You don’t have to worry about a shortage of stocks.
- This type of trade won’t happen if there aren’t enough shares available.
- Orders without special considerations must be executed first.
- These can only be done under certain circumstances.
There’s also momentum trading. With this type of trading, the trader looks for a stock that’s “breaking out” and jumps on it as fast as possible. They tend to focus on stocks that are moving quickly in one direction and buy as many shares as they can. These types of trades usually happens pretty quickly, usually within hours or days. Of course, this will depend on how quickly the stock is moving and which direction it’s going.
- You can make a high profit in a short time.
- You can get a lot of shares for a low price.
- Turnover fees can be expensive.
- It takes a lot of time spent monitoring trends and researching.
Scalping is also called micro-trading and it’s all about taking small profits over and over again. Most of the time, trades will happen within seconds and minutes. Traders who practice scalping will often make anywhere from 10 to several hundred trades in a day. They believe that small movements in stock prices are a lot easier to catch than larger ones.
- You won’t have to deal with reversals.
- You don’t need to know too much about the stock.
- It requires very little capital to get started.
- You need to have trade precision.
- You don’t usually make much money on any trade.
- It requires a lot of time and dedication.
There are a lot of people that practice swing trading as well. This type of trading is all about capturing short term trends. They attempt to capture various gains within 1 to 7 days. The traders who do this aren’t concerned with the fundamentals of stocks, but rather the prices and patterns. Swing trading is great for those that have a full-time job, but still want to try trading part-time.
- It can save a lot of time.
- It has decent risk control.
- It can generate monthly income.
- Markets can change dramatically overnight.
- Your capital is tied up longer.
Foreign Exchange (Forex)
Forex, which stands for Foreign Exchange, essentially boils down to the trading between different nations’ currencies in the hopes that various factors will swing the ratio between the two in the investor’s favor. For example, if an investor were to exchange their Venezuelan currency for USD before the Venezuelan economy bottomed out, exchange back when the dollar was worth far more Venezuelan Bolivar, then hold out for the value of the Bolivar to normalize, that investor would stand to make a tremendous profit. This level of complexity is why many traders choose to rely upon the advice of professionals such as those available at Market Traders Institute.
- Potential for tremendous profits.
- One of the few forms of trading that rewards research beyond just economics.
- Potential for profit no matter the trends in the overall global economy.
- High levels of risk.
- Exposure to risk factors in geopolitics as well as economics.
Trend trading is very similar to swing trading because traders look for trends in stocks. They tend to put money into stocks that are, on average, moving upward. This type of trading is fairly simple, and you can make good money.
- You can make money quickly.
- It’s relatively easy to figure out trends.
- You may lose more than you win.
- It’s easy to become discouraged by a few bad investments.
If your understanding is still hazy or you find these strategies a little confusing, it would be a good idea to reach out to a business like Market Traders Institute before you decide to jump into the deep end. Trading can take a lot of money, so the last thing you want is to start without knowing what you’re doing and lose everything. There’s definitely a learning curve, but with the right know-how you’ll be able to start trading in no time!