How To Decide What Trading Style Is Right For You

Figuring out who you are as a trader

Personality

The biggest step in deciding a trading strategy is figuring out who you are. This isn't in some Mad Men-style meditate and say "ohm" a dozen times type of way, but it is extremely important to know yourself when you approach trading and investing. Some type of questions you might want to ask yourself are:

  • Are you the type of person who has a hard time changing their mind on what they believe?
  • Does the thought of being wrong make your stomach turn?
  • Do you get emotional or second guess yourself when it comes time to make a decision?

Believe it or not, the way you answer these questions will certainly affect your success as a trader. Some personalities are more conducive to longer term holds and others are much more prepared for faster paced swing trading.

Regardless of who you are, you need to understand going into it that you, nor anyone you know (even the pros like myself) are not going to be right on every trade, and there will be times that you lose money. Let's get deeper into this concept by discussing the main three types of trading.

Long-Term Focus (Investors)

These are the kind of people who don't want to take on a lot of risk, but want to be a part of the market. They want to buy some stocks, tuck them away, and not look at their account for months on end. They want safe, they want to minimize volatility, and they like knowing the companies they're investing in. 

These people hate to lose, they are very patient, and they aren't obsessed with beating the market. A lot of longer term investors actually buy SPY and other index funds so that they can win at the exact same percentage as the market. These investors are generally older and much less concerned with maximizing income and much more concerned with preserving their wealth and growing it steadily. 

Types of Stocks for Long-Term Investors: X, UAA, CLF, DIS, Baba

Short to Mid-Term Focus (Swing Traders)

Swing traders are much less patient than investors, and they prefer to not have their capital tied up in long term investments. Why wait all year to make 10% when you can make that 10% in a month (or better yet, a week?) They are much less loyal to their stocks, preferring to jump from position to position.

Swing traders are much pickier on their positions, however. While an investor just needs to get in the ballpark on their entry, the swing trader needs to pick their entry points wisely, as they are playing for short-term bursts and need to capture as much value as possible. Swing traders are aggressive, quick to make decisions, and lose a lot more often than investors do. They make their money by being right more than they're wrong, and they often have more positions on than the standard investor. 

I lean towards this style of trading because I have displayed a consistent ability to deliver results with it, and it fits my personality and trader profile. I need quick hitters, as 10% a year does not satisfy my goals. I like to be in and out for a stock's biggest moves, and I move on to the next set up after each trade is finished. I have longer term investments like the ones noted above, but I primarily stick to swing trading.

Types of Stocks for Swing Traders: SQ, ADBE, TSLA, BIDU

Short-Term to Daily Focus (Day Traders)

Day Traders are the most impatient, surgical traders of the bunch. They require extreme persistence, sustain the highest number of losses, and have the most discipline and attention to detail. 

Day trading is, at times, about scalping small percentage gains throughout the day trading with the majority of one's trading account. Day traders rarely hold onto their stocks overnight, preferring instead to take all of their cash to battle with them each day. They're are also the least loyal of the bunch, picking the best possible set up each day and trying to maximize their profit. They seek to make a daily goal, and after hitting that goal, usually stop trading for the rest of the day.

To most, this is the most alluring style of trading. You get to see your wins every day, and having a daily goal to hit is definitely enticing. Many bloggers and semi-celebrities have made this style popular with Instagram posts demonstrating what day trading success can get individuals. The reality is that most people's personalities don't fit well with this style of trading, and it's more likely that your account will suffer a death by a thousand cuts through commission fees and slippage if you do not have the right approach.

Your timing needs to be impeccable, your discipline and rules need to be written and sound, and you cannot at any time let emotion bleed into your decision making process. With swing trading, you are allowed a little bit of room for error on both the entry and the sell point, but with day trading you need to execute on all levels in order to make your daily goal. It is also very difficult to consistently make $20, let alone whatever your daily goal is. While some daily set ups definitely find their way into my trading strategy, I do not recommend this style, despite what you may have read or what your uncle does with his retirement money.

Types of Stocks for Day Traders: Fast-moving penny stocks and any stocks being affected by news (acquisition rumors, scandals, etc).

Time

In addition to figuring out who you are, you need to be realistic with the amount of time you will be able to dedicate to trading. You can't be an effective day trader if you can only look at the market for 30 minutes a day, nor should you be exclusively looking at long-term ideas for 8 hours a day. You need to ensure that the opportunity cost of trading doesn't outweigh whatever else you could be doing with your time.

For example, LeBron James wouldn't spend his time working at a restaurant when his abilities on the basketball court would pay him much more, but he still invests in them and generates additional income through these investments. In the same way, you can make a handsome ancillary income through any one of the three trading styles listed above, you just need to ensure you're spending your time wisely.

For those of you with larger amounts in your accounts, it might behoove you to spend a little extra time picking good stocks and swing trading in order to enhance your future lifestyle. The opportunities are endless, you just need to ensure you're using the right tools and trading the way that works best for your style.

If you have any questions about your style, my style, or how you should be trading, feel free to email me at sterling@minotaurinsights.com