6 Styles Of Trading Strategies Find The Best One For You

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6 Investment Styles: Which Fits You?

Do you know what your investment style is? If you’re like most investors, you probably haven’t given it much thought. Yet, gaining a basic understanding of the major investment styles is one of the fastest ways to make sense out of the thousands of investments available in the market today.

The major investment styles can be broken down into three dimensions: active vs. passive management, growth vs. value investing, and small cap vs. large cap companies. Walking through each one and assessing your preferences will give you a quick idea of what investment styles fit your personality.

Active or Passive Management

In determining investment style, an investor should first consider the degree to which they believe that financial experts can create greater than normal returns.
Investors who want to have professional money managers carefully select their holdings will be interested in active management. Actively managed funds typically have a full time staff of financial researchers and portfolio managers who are constantly seeking to gain larger returns for investors. Since investors must pay for the expertise of this staff, actively managed funds typically charge higher expenses than passively managed funds.
Some investors doubt the abilities of active managers in their quest for outsized returns. This position rest primarily on empirical research shows that, over the long run, many passive funds earn better returns for their investors than do similar actively managed funds. Passively managed funds have a built-in advantage – since they do not require researchers, fund expenses are often very low. (To learn more, check out Fee-Based Research: The Good, The Bad And The Ugly.)

Growth or Value Investing

The next question investors must consider is whether they prefer to invest in fast-growing firms or underpriced industry leaders. To determine which category a company belongs to, analysts look at a set of financial metrics and use judgment to determine which label fits best.

The growth style of investing looks for firms that have high earnings growth rates, high return on equity, high profit margins and low dividend yields. The idea is that if a firm has all of these characteristics, it is often an innovator in its field and making lots of money. It is thus growing very quickly, and reinvesting most or all of its earnings to fuel continued growth in the future.
The value style of investing is focused on buying a strong firm at a good price. Thus, analysts look for a low price to earnings ratio, low price to sales ratio, and generally a higher dividend yield. The main ratios for the value style show how this style is very concerned about the price at which investors buy in.

Small Cap or Large Cap Companies

The final question for investors relates to their preference for investing in either small or large companies. The measurement of a company’s size is called “market capitalization” or “cap” for short. Market capitalization is the number of shares of stock a company has outstanding, multiplied by the share price.
Some investors feel that small cap companies should be able to deliver better returns because they have greater opportunities for growth and are more agile. However, the potential for greater returns in small caps comes with greater risk. Among other things, smaller firms have fewer resources and often have less diversified business lines. Share prices can vary much more widely, causing large gains or large losses. Thus, investors must be comfortable with taking on this additional level of risk if they want to tap into a potential for greater returns.
More risk averse investors may find greater comfort in more dependable large cap stocks. Amongst the names of large caps, you will find many common names, such as GE, Microsoft, and Exxon Mobil. These firms have been around for a while, and have become the 500 pound gorillas in their industries. These companies may be unable to grow as quickly, since they are already so large. However, they also aren’t likely to go out of business without warning. From large caps, investors can expect slightly lower returns than with small caps, but less risk, as well. (To learn more, see Market Capitalization Defined.)

The Bottom Line

Investors should think carefully about where they stand on each of these three dimensions of investment style. Clearly defining the investment style that fits you will help you select investments that you will feel comfortable holding for the long term. (For more, check out Is Your Investing Style Hot, Or Not?)
Don’t miss what’s happening this week in the financial world. Check out Water Cooler Finance: Everything Old Is News Again.

How to Choose a Trading Style That Suits Your Personality

There are four main styles of trading, namely scalping, day trading, swing trading, and position trading. The difference between the styles is based on the length of time that trades are held for. Scalping trades are only held for a few seconds, or at most a few minutes. Day trading trades are held for anywhere from a few seconds to a couple of hours. Swing trading trades are usually held for a few days. Position trading trades are held for anywhere from a few days to several years.

Choosing the trading style that best suits their personality can be a difficult task for new traders, but is necessary for their long-term success as a professional trader. If you are a new trader (or even an experienced trader) that does not yet feel as though you have found your trading style, the following are some of the personality traits that are compatible with the different styles of trading.

By choosing the trading style that best suits your personality, you will have a better chance of being a profitable trader, so be honest, even if you don’t like some of the personality traits that are listed.

Scalping

Scalping is a very rapid trading style. Scalpers often make trades within just a few seconds of each other, and often in opposite directions (i.e., they are long one minute, but short the next).

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Scalping is best suited to active traders that can make immediate decisions and act on those decisions without hesitation. Impatient people often make the best scalpers because they expect their trades to become profitable immediately, and will exit the trade promptly if it goes against them.

Being a successful scalper requires focus and concentration. So, it is not a suitable trading style for people who are easily distracted or who often find themselves daydreaming, so if you’ve been thinking about something else while reading this, then scalping is not for you.

Day Trading

Day trading as a style is more suitable for traders that prefer starting and completing a task on the same day. For example, if you were painting your kitchen, and you would not go to bed until the kitchen was finished, even if that meant staying up until 3:00 AM.

Many day traders would not consider making swing or position trades because they would not be able to sleep at night knowing that they had an active trade that could be affected by price movements during the night (such as those that cause opening gaps).

Swing Trading

Swing trading is compatible with people that have the patience to wait for a trade, but once they have entered a trade, they want it to become profitable quite quickly. Swing traders almost always hold their trades overnight, so it is not suitable for people that would be nervous holding a trade while they were away from their computer. Swing trading generally requires a larger stop loss than day trading, so the ability to keep calm when a trade is against you is a necessity.

Position Trading

Position trading is the longest term trading of all and often has trades that last for several years. Therefore, position trading is only suitable for the most patient and least excitable traders. Position trading targets are often several thousand ticks, so if your heart starts beating fast when a trade is 25 ticks in profit, position trading is probably not suitable for you.

Position trading also requires the ability to ignore popular opinion because a single position trade will often hold through both bull and bear markets. For example, a long position trade may need to be held through an entire year when the general public is convinced that the economy is in a recession. If other people easily sway you, then position trading is going to be difficult for you.

Being Faithful to Your Trading Style

Choosing a trading style requires the flexibility to know when a trading style is not working for you, but also requires the consistency to stick with the right trading style even when it is not performing optimally.

One of the biggest mistakes that new traders often make is to change trading styles (and trading systems) at the first sign of trouble. Constantly changing your trading style or trading system is a sure way to catch every losing streak. Once you are comfortable with a particular trading style, remain faithful to it, and it will reward you for your loyalty in the long run.

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