There are several types of stock trading strategies that a trader can participate in. Each type offers unique benefits, and understanding the different types of stocks is important to being a successful investor. Here we discuss a few of the most popular types of stock trading strategies, what they mean, and why stockholders use these forms of trading.
Scalping
Scalping is one of the popular types of trading done by day traders. This form of stock trading that involves holding a position open for only seconds or minutes before trading. This is the fastest type of stock trading and is targeted at small intraday price movements. The goal of scalping is to gain smaller profits through several quick trades in a day. Over the course of the day, the profits accumulate due to the number of trades being made.
Traders using the scalping method often rely on only major currency pairs when trading due to their high-trading volume and liquidity such as what is found in the USD/JPY, GBP/USD, and EUR/USD. Many scalpers make dozens or even hundreds of trades each day with the goal of exploiting the bid-ask spread.
Example: A trader buys and sells large amounts of shares of a company in order to profit off small price movements. The stock is selling for $5 and the trader purchases $10,000 worth of stock and sells them during upwards price movements in small amounts.
Momentum Trading
Image via Flickr by Simon Cunningham
Momentum trading work with stocks that are moving in a direction in high quantities. This strategy is based on a traders’ attempt to use this momentum in the stock market to gain the desired profit. Traders purchase stock or securities as they are rising and then sell them when the stock peaks. The goal of momentum trading is to use the volatility of the market to find opportunities to buy during short-term uptrends and then sell the stocks as they lose momentum.
Example: A trade purchases stock at $30 and that stock grows to $60 due to an overly positive analyst report. The trader then sells the stock for the $60 at a 100% profit before the price of the stock corrects itself.
Swing Trading
Swing trading involves making short- and medium-term gains on a stock over several days or weeks. This type of trading is based on anticipated price moves and requires technical analysis to find trading opportunities as well as fundamental analysis to look at patterns and trends in stock prices. Swing trading exposes traders to overnight and weekend risks that could result in price gaps and profit loss.
Most traders do not hold their position longer than a few months. Swing trades can also happen during a single trading session, though this is rare and typically only happens during significantly volatile conditions. Swing traders have the goal of making a profit on an anticipated price move.
Example: A trader purchases a stock after its price has dropped. Using technical and fundamental analysis, the trader deduces that the price will rise in 15 days. The trader holds onto the stock and then sells it when the anticipated price rise happens.
Choosing the trading strategy that works best for you can increase your chances of profiting from your stock trading efforts.
