Saturday, July 20, 2013

Excellent Trading School - Types of trading


There are 2 types of Trading. Active and passive

In Passive trading, Investors / Traders will purchase investments / securities with the intention of long-term appreciation in search of elusive multibagger but often end up in money beggars.

Also known as a buy-and-hold or couch potato, doing nothing strategy, passive investing trading requires good initial research, dinosaur-sized patience, a well-diversified portfolio and tons of Fixed Bank deposits.

Unlike active investors, passive investor buy a security and forgets it till one day by mistake he finds his investments multiplied infinite times, typically these Passive investors rely on their belief that in the long term the investment will be profitable. They don't actively attempt to profit from short-term price fluctuations.

Unlike Passive trading, a Active trading is the act of buying and selling securities based on short-term movements to profit from the price movements on a short-term stock chart. The mentality associated with an active trading strategy differs from the long-term, buy-and-hold strategy.

The buy-and-hold strategy employs a great mentality that suggests that price movements over the long term will outweigh the price movements in the short term and, as such, short-term movements should be ignored. Active traders, on the other hand, believe that short-term movements and capturing the market trend are where the profits are made.

There are various methods used to an active-trading. Here are four of the most common types of active trading. Active trading is a popular strategy for those trying to beat the market average.

1. Day Trading
Day trading is perhaps the most well known active-trading style. Day trading, as its name implies, is the method of buying and selling securities within the same day. Positions are closed out within the same day they are taken, and no position is held overnight (Zero risk theory baba!). Traditionally, professional traders who have no other work other than day trading do employ this strategy.

Day Trader definition:
A investor / trader who attempts to profit by making rapid trades intraday. A day trader often closes out all trades before the market close and does not hold any open positions overnight. Some day traders use leverage (extra money loaned from brokers) to magnify the returns generated from small stock price movements

Day trading is often glamorized as an easy path to riches. However, this is rarely the case. Many end up with legs up in streets and mental hospitals, "Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status." Day traders are handicapped by the bid-ask spread, trading commissions and expenses for real-time news feeds and financial analysis packages. These costs require day traders to earn significant trading profits just to break even.

2. Position Trading
Some actually consider position trading to be a buy-and-hold strategy and not active trading. However, position trading, when done by an advanced trader, can be a form of active trading. Position trading uses longer term charts - anywhere from daily to monthly - in combination with other methods to determine the trend of the current market direction. This type of trade may last for several days to several weeks and sometimes longer, depending on the trend. Trend traders look for successive higher highs or lower highs to determine the trend of a security. By jumping on and riding the “wave,” trend traders aim to benefit from both the up and downside of market movements. Trend traders look to determine the direction of the market, but they do not try to forecast any price levels. Typically, trend traders jump on the trend after it has established itself, and when the trend breaks, they usually exit the position. This means that in periods of high market volatility, trend trading is more difficult, traders go for much desired sleep and their trading positions are generally reduced.

Definition of 'Position Trader'
A type of trader who holds a position for the long term (from months to years). Long-term traders (who are fed up with the daily boring routine) are not concerned with short-term fluctuations because they believe that their (once mistaken investment if held for) long-term investment horizons will result in good returns.

Many position traders will take a look at weekly or monthly charts to get a sense of where the asset is in a given trend. Position trading is the exact opposite of day trading because in Position trading the goal is to profit from the move in the primary trend rather than the short-term fluctuations that occur day to day.

3. Swing Trading
When a trend breaks, swing traders typically get in the game. At the end of a trend, there is usually some price volatility as the new trend tries to establish itself. Swing traders buy or sell as that price volatility sets in. Swing trades are usually held for more than a day but for a shorter time than trend traders. Swing traders often create a set of trading rules based on technical or fundamental analysis; these trading rules or algorithms are designed to identify when to buy and sell a security. While a swing-trading algorithm does not have to be exact and predict the peak or valley of a price move, it does need a market that moves in one direction or another. A range-bound or sideways market is a risk for swing traders.

Definition of 'Swing Trading'
A style of trading that attempts to capture gains in a stock within one to four days, they have big money bags at home. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders aren't interested in the fundamental or intrinsic value of stocks, but rather in their price trends and patterns.

'Swing Trading'
To find situations in which a stock has the extraordinary potential to move in such a short time frame, the trader must act quickly. Therefore, at-home and day traders mainly use swing trading. Large institutions trade in sizes too big to move in and out of stocks quickly. The individual trader is able to exploit such short-term stock movements without having to compete with the major traders.

4. Scalping
Scalping is one of the quickest strategies employed by active traders. It includes exploiting various price gaps caused by bid/ask spreads and order flows. The strategy generally works by making the spread or buying at the bid price and selling at the ask price to receive the difference between the two price points. Scalpers attempt to hold their positions for a short period, thus decreasing the risk associated with the strategy. Additionally, a scalper does not try to exploit large moves or move high volumes; rather, they try to take advantage of small moves that occur frequently and move smaller volumes more often. Since the level of profits per trade is small, scalpers look for more liquid stocks/markets to increase the frequency of their trades. And unlike swing traders, scalpers like quiet markets that aren't prone to sudden price movements so they can potentially make the spread repeatedly on the same bid/ask prices.

Definition of 'Scalper'
A person trading in the equities or options and futures market who holds a position for a very short period of time in an attempt to profit from the bid-ask spread.

The rapid trading that occurs in legitimate scalping usually results in small gains, but several small gains can add up to large returns at the end of the day. There is also an illegal type of scalping in investments in which an investment advisor purchases a security, recommends it as an investment, watches the price increase based on his recommendation, then sells the security for a profit, in local parlance, they are called operators nemesis of the investors.

New traders / Beginners can employ one or many of the mentioned strategies. However, before deciding on engaging in these strategies, the risks and costs associated with each one need to be explored and considered.
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