Determine the Trader You Want to Be
Behind every great stock trader is a strategy or trading plan. However in order to develop a trading plan, you'll need to know what type of trader you are or would like to be. Are you a trend follower, swing trader, momentum trader, or day trader? All of the aforementioned involve slightly different strategies. However, all of which when carried out properly can become profitable.
Generally speaking a trend follower will hold a stock for months on end or longer. It is possible to combine both technical and fundamental analysis in determining stock picks. Their goal is to capture huge gains over a longer period of time. Trend followers aren't necessarily concerned about whether or not the stock is down one day or the next as long as it is still trading within a channel or the trade set up is still valid. The pros of being a trend follower is that you don't pay attention to the noise that happens throughout the day. The con is that you will have to exercise extreme patience and understand that your capital may be tied up for a long time.
Day traders trade out of their position by the end of the day. Because you are of trades by the end of the day, your trading account will not be impacted by gap ups or gap downs. Day traders look to leverage large amounts of capital to take advantage of small price movements. The reason they are able to do this is because they are in and out of positions within minutes or maybe even less. In order to be a day trader, your broker requires you to have a margin account and you must have at least $25,000 in trading capital. A margin account will allows you to borrow funds to trade.
Momentum traders trade based on news or some kind of catalyst such as earnings reports or mergers & acquisitions. They are looking for stocks with lots of volume and has the potential to move large percentage points in a day or two. Unlike day traders who may trade throughout the day, momentum traders typically trade the most active periods of the day which are the first few hours of the day and then towards the end of the trading day.
Most swing traders play in the time frame between day traders and long-term traders. Typically this could be a few days to a few weeks. While swing traders may enjoy better win-loss percentages than longer-term traders, they are stopped out of positions a lot more often.
Swing traders enjoy better win percentages and smaller average loss sizes than longer-term traders, but they need to constantly re-enter into positions that they've been stopped out on previously. While long-term traders may be concerned about the fundamentals of a stock, swing traders are more concerned about the technicals such as price action and patterns.
Labels: Finances, Pro Stock Trading Tips