So before you slap all your hard earned money into the markets all willy nilly, you need to start thinking about what you hope to get out of this, and more importantly, what types of risk you are willing to take on to get there.
Everyone has his or her own trading style based on the type of risk they’re willing to absorb. What type of trader are you? In the words of the immortal Bruce Lee…
What Type of Trader are You?
Over time your trading technique or style will refine itself, but in the beginning you need to set some goals and hash out a plan. Here are the main categories most people tend to fall into:
Long-Term Investor or Position Trader
Risk Tolerance: LowThe most common group of retail investor. These guys are unconcerned with short-term bumps in the road and hold stocks for months or years, often collecting dividends to reinvest or retire on. As fundamentals investors they look for strong balance sheets, increasing revenue, and a strong management team. Warren Buffett might be considered a position trader. Many traders are long term investors, and fall into this group.
Short-Term or Swing Trader
Risk Tolerance: MediumHolds stocks for days to weeks looking for bounces off of key chart indicators, like moving averages or fibonacci lines. May also subscribe to Elliot Wave theory. Will often go short, or buy options on a position when sentiment changes. Unwilling to buy penny stocks or small-caps, these sophisticated traders are another big chunk of retail investors.
Risk Tolerance: HighWilling to only hold a stock position for a short period of time, hours, minutes, or even seconds, often using leverage or margin. Day traders are chart masters and use technical analysis, or pending news or data releases to pick entry, exit and stop points. Often trading full-time the key to a day trader is they rarely hold stocks over night to further reduce risk, especially in the modern era.
Bio-runup / Penny Stock Trader
Risk Tolerance: Very HighNovices usually start here, but often to their peril. Penny stocks are caveat emptor (buyer beware) for a reason, and some OTC companies are setup with the sole intention to defraud investors. Literally millions of people have been defrauded with penny stocks, and the SEC seems too busy to investigate most of it. Having said that, there is a decent amount of penny stock traders who make profits trading small and micro cap stocks or moreso Bio / Pharma FDA runups. Not for everyone, but worth looking into if you have an appetite for risk/reward.
So this is mostly a basic list, but we’ll reference these techniques and expand on each of the trading styles as we move forward in this series. For now you should have an idea where you fall within these basic strategies. We’ll also get intimate with some more advanced stuff working with options, hedging, and short positions, but they require their own articles.
You do not need to land exactly in one of the categories above, as some people will eventually work in between somewhere. Many traders deploy a mix of strategies with say, a diversified portfolio making up 75% of their positions, and 25% being left over to be used for swing or day trading. Some risk averse senior investors I know still have a few penny stocks in their portfolio – just in case.
The point is to think about what type of trader you are based on what type of person you are, and the risk you’re willing to take on. Are you a gambler who can take calculated risks successfully? Maybe you have a young family to look after and just want to collect low hanging fruit and dividends? A bit of a mix? This is something you need to identify clearly, prior to hashing out any trades.
Let us know what type of trading strategy works best for you in the comments below. Don’t forget to subscribe to RSS to get the latest updates.