Making money from trading in a financial market may be a thing of luck without a proper trading plan. The stock market or any other financial market requires strategies to earn from them consistently.
Since there are different ways to trade the stock market, it is essential to find your unique trading style and utilize it to your advantage. New traders can find their distinct trading techniques and learn to trade on MTrading web trading platforms and other services.
There are many ways to trade the stock market, and each method has its benefits and downsides. The profitable trading technique is based on your trading psychology (behavior and risk tolerance). This article explains all you need to know about trading techniques and which is more profitable.
Types of Trading Techniques
There are two major ways to make money from the stock market, the first is the buy-and-hold strategy or passive trading and the second is active trading. As the name implies, the buy-and-hold method is more of a long-term investment where you buy a particular stock intending to own it for an extended period.
Active trading, on the other hand, involves you buying or selling assets in real-time to make money within a short period (hours – weeks). This kind of trading requires lots of technical analysis from the trading charts and an understanding of your unique trading psychology.
There are different techniques for actively trading the market, and you can choose any that resonates more with your behavior. They are:
Day Trading
Day trading is sometimes used interchangeably with active trading as it is the most popular method of non-passive trading. This trading technique involves buying and selling securities within the same day to make profits.
What distinguishes day trading from other trading techniques is that every position taken (sell or buy) is closed that same day and not held till the next. This type of trading can be done by both professionals and beginners.
The advantage of day trading over the buy-and-hold technique is that you can seize the market’s current volatility and make a profit from them. Your capital is not subject to the risks of post-market or pre-market price changes.
Day trading is also considered the most exciting form of trading since you get to ride with the market’s movement throughout the day. If you are a trader looking for some adventure and prefer not to hold a particular long-term position, day trading is likely for you.
Since day trading will require you to take multiple trades within a short period, the transaction cost will be higher. Before opting for this form of trading, you must be willing to give as much time as possible to monitor your trades. For a person with a busy schedule, this may not be your best trading style.
Overall, day trading is all about the small wins as opposed to the larger rewards that come with buying and holding for an extended period.
Position Trading
Position trading is sometimes categorized as a buy-and-hold strategy, but when done by an experienced trader, it is an active trading strategy.
This technique requires you to trade the market based on its long-term movement, using higher time frame charts (daily-monthly). You will have to enter a position and hold it for days, weeks, or more, depending on the direction of the market trend. Position traders are also trend traders because they enter the market when a visible movement has formed and follow it until the end.
To be a trend trader, you will have to take notes of higher highs and lower highs to determine the direction of the trend (up or down).
Generally, the positioning strategy is easier to trade than other active trading techniques. All you need to do is look out for the market’s direction and hold until the end of the trend. Many technical analysis tools offered by online trading platforms also support this type of trading. However, you must have a strong background in technical analysis to make accurate decisions.
Position trading requires a lot of patience as your reward is in the long term. While the market is moving in your desired direction, there are also moments of small fluctuations that lead to losses. For this reason, it is not advisable to use this trading technique for highly volatile securities.
Swing Trading
Swing trading requires you to hold a trade for more than a day but not as long as you would for position trading. Swing traders usually enter the market at the end of a trend and during a period of high market volatility.
Swing trading will require fundamental and technical analysis to know when to buy or sell. It generally requires less time to monitor and has the potential to yield more significant returns per trade. Nevertheless, it opens you to the risk of substantial losses if anything goes wrong.
Scalping
This is the most “active” form of active trading, where traders enter a position and leave in
a matter of minutes. A scalper takes advantage of tiny movements in the market instead of bigger moves and makes profits or losses.
This form of trading is great for those who want to trade the market actively and have no patience for the larger rewards. Since a scalper runs after little movements, the profit per trade is small. It is better to trade more liquid and less volatile securities to maximize profit.
The advantage scalping has over other forms of trading is the need for little or no knowledge of technical analysis. However, it is time-consuming as it requires you to go in and out of the market for an extended period to make tangible profits.
Due to the series of orders taken during this trade, you will likely incur a higher transaction cost.
Bottom Line
The question of which trading technique is most profitable depends on the nature of the trader. Any methods mentioned above are profitable as long as it is compatible with your trading psychology, investment goals, lifestyle, knowledge of technical analysis, and risk tolerance.