5 Types of Stock Market Trading Explained
In recent years, stock market trading has garnered the interest of many who are looking to try their hand at predicting the price movements of financial markets. But since there’s so many ways to take part, it’s easy to get lost in a flood of options, not knowing where to begin.
If you feel just a little bit like this, don’t worry – we’ve got you covered! Today, you will learn about 5 different types of stock market trading. By the time you’ve finished reading, you’ll get a better idea of which one is the most likely to suit you best.
- Long-term trading
When you think of stock trading in the most traditional fashion, long-term trading comes to mind. Since it gives you plenty of opportunities to adjust your position as the prices jump in the financial markets, traders with low risk appetite may prefer this over other types of trading. If you consider yourself more likely to be drawn by a conservative style of trading, long-term trading might be for you.
While there’s no one-size-fits approach to it, conservative traders are the ones who are unlikely to be scared away by sudden price movements – instead, they choose to look at the big picture of where the market is headed. To do so, they may resort to complex technical analysis and supplement their decision by keeping in the loop with the industry’s latest news and developments.
In some cases, they are willing to hold onto their trades for years, but they’re not opposed to using leverage and spread betting to maximize their potential returns. On the flipside, leveraged trading also has its fair share of risks – think of it as a double-edged sword. While the payoffs will be magnified if the trade goes your way, so will the losses in case it doesn’t.
Betting on spreads, for instance, has leverage built into it and it’s also a great option for those who want to try their hand at trading without making a large initial investment. In this case, the result of the trade is determined by the difference between the stock’s initial and exiting value rather than a fixed number.
Finally, long-term traders should outline their investing goals by deciding between two major sub-types of long-term investments: growth and income stocks. While the former will not pay you dividends, the latter will. You can then opt to reinvest these dividends into growing your investment portfolio.
- Day trading
Day trading is much more aggressive in nature and suitable for those who are not afraid to capitalize on rapid price movements in the financial markets. It’s also one of the most popular types of trading that’s very much appealing to those who don’t want to commit a substantial amount of time to their newfound hobby.
Typically, those who do day or CFD trading would sell their stock the very same time, sometimes in a matter of hours. But if you’re not willing to monitor the movement of stocks to pinpoint the ideal time to enter a trade, this can be a risky endeavor. Although there’s no need to get too technical in the beginning, it’s a good idea to study the fundamentals.
Day traders take advantage of the stock value swings that happen throughout the day.
- Swing trading
Swing trading is all about analyzing the price movements of a stock in a given timespan. This could be 5, 10, 15, 30, 60 minutes, or any other value that’s of interest to you. The idea is to find a pattern that’s somewhat reliably repeating itself over time, thus allowing you to capitalize on the trend. However, as a beginner, you should probably look at other ways to trade stocks, because the consensus is that swing trading is one of the harder types of trading to get into.
In essence, this form of trading likes to embrace the volatility of the financial markets to its fullest. As wild and unpredictable as it may be, in this case, this only pours gasoline on the income potential of trading.
- Positional trading
Positional trading focuses on monitoring the stock’s momentum to make the best possible buying decision. It lies somewhere in the middle of the spectrum between short term and long term trading. So if you feel brave and stable enough to not get discouraged by the short term price fluctuations in the stock market, positional trading might be for you.
Still, when doing positional trading, having a solid understanding of technical analysis is recommended. To make the best decision and identify the perfect entry and exit points, you should study the chart and draw support and resistance lines so you’ll have a better understanding of where the stock is headed and what is likely to happen in the future.
Bear in mind that technical analysis isn’t a magical crystal ball that will communicate to you in terms of certainty, but rather in terms of likelihood. To better understand what you’re dealing with, you’re encouraged to get familiar with industry concepts like simple average, moving average, MACD, RSI, etc.
- Scalping
Scalping is the kind of stock trading that lies somewhere towards the short-term end of the spectrum. Although this style of trading very much resembles what a typical day trader would be doing, there are a couple of notable differences.
Most notably, scalpers capitalize on their ability to focus on their trades like a hawk, pinpointing multiple short-term trades throughout the day they believe will net them a nice profit. Even if they lose a few in the process, a scalper will be more than willing to take the sacrifice if this means the majority of the trades they enter will go their way.
To be efficient at scalping, however, you will likely need some experience, so beginners should probably familiarize themselves with more traditional forms of stock trading first. Once they feel comfortable niching down and trying out things like scalping, a whole new world of possibilities opens up. In scalping, an average trade lasts anywhere between a couple of minutes to an hour.
Conclusion
Since the accessibility of the internet has made it possible for anyone to try their hand at stock trading from the comfort of their sofa, there is no better time to get into the game than now.
Once you get familiar with the basics, you can then progress to things like spread bets and CFDs to discover your trading style. Remember that online trading does not come without risk. As long as you only stake what you can afford to lose, you should be in the right frame of mind to make optimal decisions.
The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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