Types of Stock Trading Strategies
Which way suits you best? Let’s find out!
Fun fact! Despite the inaccurate representation of stock traders as a bunch of pricks in movies, there is actually more to it. Don’t get us wrong, the prick part is pretty much true, only that there is more than just one kind of trader out there.
Let’s see which way of being a prick suits you best!
No, I’m kidding, some of them can actually be really nice, like my senior associate who just glanced over my shoulder as I write this.
As with all things, we think it would be prudent for us to set things straight. The different types of trade styles we’re going to explain below are not definite separations. Some of these styles can overlap.
You can look into it in terms of your financial goals, your stock trading preferences, and the time period you set for your investment journey.
For example, you can be a long-term trader, who apparently is employing the fundamental analysis trading strategy.
Under the time horizon, there are two major angles for you to look through. Each angle is then separated into three. The first one is more focused on your goals, i.e., when do you expect your investment to bear fruits? The latter is more focused on how frequently you trade.
They sort of overlap, but you get a general idea. Here’s the first one:
Short-term trading refers to a trading approach where you would usually hold on to certain stocks for a period of less than one day up to a few weeks. People who delve into this time horizon would usually go into more volatile stocks to make money off the short-term price movements.
Medium-term traders would usually set their goals to earn from their investment in the span of a few months from their investment. This strategy would usually mean that the traders are going to look for stocks that are not too stable, as stocks that are too stable usually don’t grow much in that span.
These traders would usually go for stocks that are high or slightly high in volatility.
Long-term traders are those that seek to bear the fruit of their investment in the span of perhaps a few years, or sometimes even decades. Traders that employ this method would usually look for stocks with strong potential for growth, and most are stocks that are growing at a stable rate.
Take Warren Buffet’s Berkshire Hathaway as an example, they’ve been investing in Coca-Cola (NYSE: KO) since the ’80s, up to a point that they are currently holding 400 million shares in Coca-Cola. In 2022, Coca-Cola paid around $704 million to Berkshire Hathaway.
Intraday traders, most commonly known as “day traders” refers to traders who seek to make daily trades and gains. These traders would usually look to buy and sell stocks within the span of 24 hours, with a little bit of more or less here and there.
How they make money is usually by going for stocks that are volatile, and they seek to monetize based on the market open price and the market sell price of the stocks.
If you’re thinking of becoming a day trader, be sure that you can devote your time to do daily analysis; and to calculate trading fees and commissions into your calculations as it may eat away at your profit.
Many intraday traders use the technical analysis method to evaluate their prospective buys.
Positional trading is where traders look for the long-term growth of the stocks, where they will usually ignore short-term price fluctuations, even when it’s going down.
How they will do it is that they’ll usually use the fundamental analysis method to see if a particular stock is worth holding. If they see the price is falling significantly, they’ll usually review the stock’s fundamentals, and if it’s still looking good, then they’ll most likely hold it.
The downside of positional trading strategy is that sometimes your fundamental analysis may not account for how the market in general is full of irrationalities, so you can lose money when you hold on to stocks that become prey to the market’s irrationalities.
Swing trading refers to a strategy where a trader would usually look to buy and sell stocks within the span of one day to a few weeks. Unlike day trading, swing trading is a bit longer, but not as long as how positional trading usually is.
How they make money is by ‘swinging’ from one stock to another, as long as they think that there’s a prospect that the stock will rise in their preferred timespan.
They usually employ the technical analysis method which is more suitable for fast-paced buys and sells, but they also sometimes use fundamental analysis methods to validate their judgments.
Strategy-wise, the two most commonly used styles are fundamental and technical trading.
Fundamental trading is a strategy that is usually used by traders who seek to buy and hold an asset for some time. Fundamental traders would look at a company in specific, particularly on the events that concern the company they’re interested in.
There are a few things that fundamental traders would look at, but generally, they are events that may impact the company’s valuation, such as earnings reports, projected earnings reports, mergers & acquisitions, data on earnings per share (EPS), revenue, cash flow, analyst estimates, and stock splits.
Essentially, what fundamental traders do is they’ll look into all the data mentioned, and they’ll look into the economic situation. They will then try to see how well a particular company can do in the future.
The key to fundamental trading is that they’ll look for companies with the potential to succeed in the future based on the data that they have.
The downside of fundamental trading is that they usually can’t make short-term movements projection, which is why this method is often used by traders who are looking at medium to long-term trade.
There are generally two types of fundamental traders: qualitative and quantitative. Qualitative traders would look at the data and use their ‘human judgments’ to make their call. Quantitative traders are more inclined towards an algorithmic and mathematical method of deciding whether to buy, hold, or sell their stocks – nowadays a lot of this is done by employing artificial intelligence (AI) software.
However, even qualitative traders nowadays somewhat employ a certain level of quantitative method in their analysis.
Technical traders are the kind of traders who will look into historical data to make predictions on stock movements. This method is commonly used among short-term traders (especially intraday traders).
Technical traders believe that the market moves in a repetitive pattern, so whenever they see certain events unfolding which resemble something from the past, they tend to make their trade based on what happened back then.
Technical traders would usually look for patterns in any type of data related to the company, even the stock chart movements. The advantage of the technical analysis method is that they can decide more swiftly to buy, hold or sell since they have historical data to back their decisions – that’s why most intraday traders (a.k.a day traders) are made up of technical traders.
The downside to it is despite civilization – or any form of progress, for that matter – moving in a pattern, they often move with a slight variation in the details. So, even if the market is moving in a pattern, the stock that you buy may be one of the variations which may go in an unexpected way.
Apart from that, there are many other factors that may affect how the price moves which you may have overlooked. After all, there are a million and one ways the market can suddenly change directions.
Taking a guess solely based on patterns can be like hunting for boars in the dark. You can take a shot based on the bustles in the bushes, but it doesn’t always mean you’re coming home with a boar if you do.
There are generally two types of technical analysis that are used by technical traders: chart patterns and statistical indicators.
Chart patterns refer to a method where traders look at the stock chart movement, and they try to see if the pattern indicates that the trend is going to change, or it’s going to continue, or if it’s at a point of taking a wild guess.
Statistical indicators refer to mathematical/statistical formulas that traders often apply to stock prices or volumes. These indicators can be like moving averages, trend lines, and more. It is used for traders to analyze the patterns and make better calls for their trades. This function is usually available in trading analysis software/apps used by traders.
The core difference between fundamental and technical analysis is the question that they’d ask themselves before going for certain stocks.
Fundamental traders would ask whether the data shows that this stock is fit to soar in the future, while technical traders would ask if there were a certain pattern before to indicate that this stock can soar.
Copy trading is a type of trading that involves copying or replicating the trades of another trader. In copy trading, an investor selects a trader whose trading strategy they want to replicate and then automatically copies all (or most) of their trades in real time. The investor’s account will then reflect the same trades, profits, and losses as the copied trader’s account.
Copy trading has become increasingly popular in recent years, as it allows investors with little or no trading experience to participate in the markets by following the trades of more experienced traders. It can also be a useful tool for experienced traders who want to diversify their portfolios or learn new strategies from other successful traders
The downside to it is that you’re now entrusting your money to whichever it is that you’re copying.
In conclusion, there are various types of stock trading strategies, each with its own advantages and disadvantages. The most common types of trading strategies are short-term, medium-term, and long-term, with day trading, swing trading, and positional trading falling under these categories.
Traders can also employ fundamental or technical analysis to inform their decision-making process. Ultimately, the choice of a trading strategy will depend on an individual’s financial goals, risk-averseness, stock trading preferences, and time horizon for investment.
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