Types of Trading. Pros & Cons.

Types of trading

There are five main types of trading available to technical traders: scalping, day trading, momentum trading, swing trading and position trading. Each of them provides different opportunities and challenges. Find the one that best suits you is key to be a successful trader.

Scalping

Scalping trading specializes in taking small profits from small changes of price of a stock or coin. Commonly, scalping traders complete between 10 to over a hundred trades in a single day. It requires to have a plan to prevent loss and exit before a large loss erase all the small gains made on previous trades. Most traders who choose this strategy belief that small movement of prices is easy to anticipate than large ones. They also believe that smaller moves are more frequent than larger ones. Even in a quiet secular market, scalping trader can take advantage of the small movement of prices.

Day Trading

Day trading as name said consist in buy a stock or coin and sell it in the same day. In essence, traditional traders that trade stocks need to close their positions before market closes. Although in the cryptocurrencies space the market never close you should close your trade before you finish your trading day. Both scalping and day trading are considered intraday trading. For this reason, you shouldn’t go to sleep with an open position. In fact, many people that hold a position overnight waiting to recover losses end losing much more. 

Often day trading is conceived as an easy way to get rich fast. However, day trading is a profession and as so it requires knowledge and it take time to develop the skills to profit from it. Same as an engineer or a doctor who spend 4+ years studying and development skills. Day trading requires the right tools, education, practice and resources. It requires many hours of reading books, watching YouTube videos about different strategies and different trading styles until you are able to find which works better for you. 

An average successful trader can make between 1% to 2% on each of his trades every day. That mean if you have a buying power of 20,000$ you could make between 200$ to $400$ on a daily basis. That’s equal to 4,000$ to 8,000$ a month.

People also see attractive to day trade due the lifestyle it provides. Making your living by executing trades from the comfort of your home or in any place of the world. The problems are that most people have the misconception that day trade is easy. However, inexperienced people can erase their portfolios quickly.

Day trading require strong discipline, time and ability to learn how to trade a tested and profitable strategy rapidly. It also requires enough capital to withstand unexpected losses.

Pros

• Protect from overnight and weekend risk 
• Protect from markets reversals
• Many trades in a day.
• Can take advantage of compounding gains.

Cons

• Requires to trade as a daily basis
• Day traders often miss longer-term trends in favor of short-term market moves
• Require strong discipline, ability and skills

Momentum

Momentum traders are looking for opportunities were a stock, or a coin is breaking out and they rush to capture as much momentum of the trend up as possible. They chase stocks and coins with high volume changes in the last few hours. The common time frame for this type of traders is from a couple of hours to several days, depending on the volumes and the direction of the price. Most if these movements are occasioned by news related to the stock or the cryptocurrency project. Exchange listings, network upgrades, partnership announcements are some examples of why a stock can gain momentum.

Swing Trading

Swing trading is about capturing short- term trends that usually tend to last over a period of a couple of days to several weeks. Most of the swing trader prefer to use technical analysis to find opportunities and identify short-term trends. This type of traders avoids the use of fundamental analysis and they just focus on the analysis of charts and patterns. 

If you are planning to trade while you still work a full-time job, swing trading is probably your best choice. Since positions stay open for several days or weeks, and just need to complete a few trades every month.

Swing traders will often look for opportunities on the daily charts, and may watch 1-hour or 15-minute charts to find precise entry and stop loss points.

Pros

• Requires less time to trade than day and scalping trading
• Maximizes short-term profit potential by capturing the bulk of market swings
• Traders can rely exclusively on technical analysis, simplifying the trading process

Cons

• Trade positions are subject to overnight and weekend market risk
• Abrupt market reversals can result in substantial losses
• Swing traders often miss longer-term trends in favor of short-term market moves

Position

Positions traders are characterized for the longest holding period of all types of trading. Positions can stay open from weeks to over couple months. This type of trader tries to identify trends that will last for long term and they will hold positions longer than swing trader. This provide trader that cannot trade frequently the opportunity to still taking advantage of the markets. At the contrary of day trading that profit from the noise and daily fluctuation regarding the trend. position trading will profit from the primary trend.