How to Choose Your Stock Trading Style
By Barbara Rockefeller
Generally, stock market traders tend to have one of two personal trading styles, and the style dictates the holding period. In a perfect world, as a stock trader, you first determine whether your security is trending or range-trading sideways, and then you apply the appropriate indicator. In practice, you can’t always classify price moves as trending or not trending in a neat and tidy way. Besides, prices usually have an identifiable range, whether they’re trending or not. In addition, retracements always create doubt — you find yourself wondering, “Is it a momentary correction or a reversal?”
If you mix the indicators for the two types of trading style — trend-following and swing-trading — you may get confused. One may tell you to stay long when the other one says sell. One example of this is when a downtrending price becomes temporarily oversold and then bounces upward. You may engage in a little wishful thinking that you see a trend reversal, and you become a buyer of what you think is a new uptrend. To try to avoid making this mistake, you need to choose a core guiding principle, either trend-following or swing trading.
Being a market trend-follower
Traders who like to identify trends can use a couple of techniques:
- 1. Wait out retracements and sideways range-trading situations until they resolve back into a trend.
2.Use information from momentum indicators to modify their positions — for instance, by taking some profit when the security becomes overbought or oversold, even though the trend is just pausing. They expect it to continue.
This figure illustrates a trend, complete with minor retracements, and shows how a trend-following trader makes decisions.
If you choose trend-following, you choose to suffer through the downward bounce in an uptrend (or the upward bounce in a downtrend). And if you have correctly identified the trend, your patience pays off when the trend resumes.
Being a market swing trader
These folks operate, whether a trend is present or not. Swing trading is buying at relative lows and selling at relative highs, regardless of whether the price is trending:
- Pro: Swing trading is more flexible than trend-following because you can apply the techniques under different market conditions.
Con: Swing trading requires more frequent trading, and the profit on each leg of the trade tends to be smaller than in a single trend-following trade.
A swing trader may know that a price is downtrending, for example, but he’s still willing to buy it for a short-term profit opportunity when a momentum indicator says it’s temporarily oversold and likely to enjoy a bounce upward.
This figure shows how the swing trader tries to capture every move, including the retracements.