What Kind of Investor Are You…?. 4 styles of trading and what they can… | by Jamie Bullock | Sep, 2022 – DataDrivenInvestor

4 styles of trading and what they can mean for your portfolio

Photo by Austin Distel on Unsplash

One of the most important questions you can ask an investor or trader is: “what’s your time horizon?”.

Time horizon is how long you plan to hold an asset, and this will be tied into your overall strategy for making money.

I will now dive into 4 different styles, and what they mean for your portfolio.

Day trading is buying and selling financial assets within a single day.

Therefore, the time horizon for a day trade is hours or even seconds. A day trader relies upon technical analysis combined with overall market knowledge to make trading decisions.

Buys and sells will often be automated using limit orders.

The fundamentals of the asset traded such as the financial health of a company are not considered.

Day trading is extremely time intensive and requires a high level of skill to be successful.

Swing trading is similar to day trading in that it is based primarily on technical analysis and market knowledge.

The main difference is that swing trades can last for days or even weeks.

Swing traders will use tools such as Gann analysis to identify changes in price trends (up or down). They then trade these price swings.

A risk in swing trading is that prices can jump abruptly outside of trading hours, for example as a result of bad news.

Swing traders can also benefit from downwards price movements as well as up, by using short trades.

Swing traders will use limit orders and stop losses to manage risk.

Position trading is similar to swing trading, but looks at longer-term price trends.

A position trade can last for months or even years.

The aim is to build a position in an asset by buying at clearly identified levels and then allowing that position to accumulate in price according to a medium-term trend.

Position traders will combine technical analysis, with market knowledge, and fundamental analysis to identify which assets to buy, and at what points.

Position traders will also often average in and out of their position, buying in at low price targets and selling part of the position (taking profits) as prices rise.

Buy-and-hold investing is a strategy where an asset is held for many years, even decades.

Buy-and-hold investors are focused on company fundamentals rather than technical charts and overall market conditions.

The aim of investors is to buy companies that are underpriced by the market compared to their long-term potential.

Some of the wealthiest and most successful investors of all time such as Warren Buffet have adopted a buy-and-hold investing strategy.

Which style of investing or trading is right for you depends on a number of factors:

  • Your level of knowledge and experience
  • How much time you have
  • Your risk tolerance
  • Your motivation for trading or investing

In general, the shorter the time frame, the higher the risk.

So if you are a novice, a good starting point would be buy-and-hold investing in a passive index fund such as an S&P 500 ETF.

All other approaches require a significant amount of study, and years of practice before becoming proficient. Patience and persistence are key.

What I want people to take away from this piece isn’t so much an understanding of the different trading styles, but the simple fact that time horizon is so important.

If you are buying stocks or crypto, and don’t have a plan for when you are going to sell, you are setting yourself up for failure.

Before hitting the buy button, consider what your strategy is.

  • When are you planning to sell?
  • At what price will you sell?
  • At what price would you buy more? If at all
  • Can you stomach the price dropping by 50% without panic selling?

Maybe you never plan to sell, in which case it’s a buy-and-hold strategy, but in this case, you need to be ready to hold through thick and thin.

If you don’t know the answers to these questions, then consider writing down a strategy.

Many traders and investors will employ more than one strategy.

Personally, I have long-term buy-and-hold accounts where I accumulate assets with a “never sell” mindset. I also have lower-value accounts where I position-trade on shorter timeframes.

Keeping the accounts completely separate enables me to mentally separate the different strategies I’m employing.

DISCLAIMER: This article presents my own learnings based on personal experience. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.

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