Different Types of Trading Strategies
When it comes to retail trading, there are more than a few strategies that casual retail traders typically employ. We’ll cover the basics of the most commonly used strategies, shedding light on the important components of each.
Scalping – probably the most technical of the bunch, scalping involves extremely short time-frames, typically only a few seconds to a few minutes. Scalping is based on short-term pattern recognition in prices, and traders attempt to be in and out of trades very quickly for a small amount of profit. Scalpers will typically end the day flat (with no positions), so they aren’t exposed to major overnight events or risk factors. Because scalping tends to need higher amount of trading activity due to the low risk/reward of each trade, traders typically need to have an account of $25k or over to use (we’ll get into the pattern-day trader rule in another post, but the general rule is that accounts with less than $25k equity may only make three day trades in any rolling 5 day period).
Day Trading – closely related to scalping, day trading extends a somewhat wider view than scalping and generally looks to capitalize on trades at least within the same day. Trades are usually given more ‘leash’ than with scalping, and profit targets are usually bigger, so less volume is required than with scalping. Similarly, traders generally look to end the trading day flat so they are not subject to market risk overnight or the next morning. Day trading also almost always requires traders to maintain an account balance of $25k so they don’t trigger the pattern-day trader rules.
Swing Trading – swing trading is probably the most common trading strategy among active, casual retail traders, though there are several different strategies that can be deployed. Generally, swing trading involves some type of technical analysis – looking at patterns, moving averages, resistance or support levels, or some other type of indicator of momentum – and trading based on expected moves relative to those metrics. Time frames vary widely, with some traders opting to only hold for a day or two (or potentially intra-day if the trade works quickly), all the way up to holding positions for multiple months. Because swing trading is done less frequently than day trading or scalping, profit targets and stop losses tend to be much greater, so the trading frequency can be less. Shorter time frames tend to be better for traders who like to be active in the market and like to cap gains or losses and move on, whereas longer time frames usually allow traders to set larger profit targets. Many traders employ different strategies and time frames at the same time.
Buy and Hold – finally, the easiest strategy to understand, the buy and hold strategy. While not the most exciting of the group, buying a stock and holding for long periods of time can be a safer form of trading that offers the most upside. It also requires the least amount of upkeep, so for investors who don’t want to be in and around the market on a daily or weekly basis, this can be the right avenue. Buying and holding, when done consistently, also offers the advantage of being able to weather most market environments (as long as investors stay disciplined to their personal strategy)!
There are many different types of trading strategies, and it is up to each trader to figure out which ones are best for them. Experience, interest, risk tolerance, and liquidity should all be incorporated when thinking about these strategies.
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Terms: “call spread,” “Expires” “positions” “71% positive” (pie chart) “positive snippets” and “negative snippets.”
“*Pre-packaged spreads are option spreads formed by our algorithm and offered as a package.”
“A bull call spread is an options trading strategy designed to benefit from a stock’s limited increase in price. The strategy uses two call options to create a range consisting of a lower strike price and an upper strike price. The bullish call spread helps to limit losses of owning stock, but it also caps the gains.”
“An expiration date in derivatives is the last day that derivative contracts, such as options or futures, are valid. On or before this day, investors will have already decided what to do with their expiring position.”
“Positive and Negative Snippets are a proprietary output from our partner Stocksnips that aggregated the total amount of media mentions of a certain stock and takes the percentage of those that are positive or negative, as in the example shown above referencing 71% positive”
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*Options trading involves a high degree of risk and may involve total loss of investment. Options spreads, specifically, offer the benefit of projected maximum gain and loss positions (defined above as “defined risk trades” and “defined outcomes”, but in rare situations may result in gain/loss in excess of the projected cap. Optionality has several mechanisms to greatly reduce these occurrences, but we cannot guarantee they will never happen. For more information on options, Please read Characteristics and Risks of Standardized Options before deciding to invest in options.