5 Types of Trading in the Stock Market

Updated September 14, 2022 GuidesLatest ReleaseStocks

Today’s stock markets have developed into a trillion-dollar industry, accessible at the touch of a button on your smartphone and tablet. The opportunity to own, buy or sell stocks is readily available to every trader, no matter what their level of experience and expertise. You can choose to trade and invest in a huge variety of companies, from Apple to Amazon and Tesla.

Intrinsic to this is how you decide to trade as there are several different types of trading in stock markets. Choosing which style or strategy you use will help you stay in the markets for the long-term, in tune with your goals and ambitions.

Why are there different trading types?

Traders are all different which means there are various ideas about how to enter and exit the stock market, how often to trade and how long to hold a stock position. A trading strategy often reflects the personality and temperament of the trader. Much also depends on your commitment to trading, your risk tolerance and your account size. It is important to try and find a trading type that suits you.

Are you someone who desires quick results? Or are you more laid back and happy to wait for long-term results while prices move around? The more a trading style fits with your character and lifestyle, the more likely you are to be a successful trader.

What are the main trading types in the stock market?

There are three popular styles of trading which are commonly used by traders across the globe, enabling them to execute orders in hundreds of types of products and markets.

1. Intraday trading

This type of trading means you hope to take advantage of short-term market movements during the daily trading session. You will enter and exit your positions before the market closes every afternoon. That means you avoid some of the risks and added costs of holding a position overnight. Intraday trading often involves high volumes of orders in potentially fast-moving markets. It is sometimes known as a form of day trading or “scalp” trading.

2. Swing trading

This strategy involves taking positions over several days or even weeks. Traders will hope to use short to medium-term price action to determine entry and exit levels. The goal is to identify long-term trends and avoid rangebound markets.

Spotting a “swing high” when price moves upwards or a “swing low” when there is a fall in prices may present an opportunity to go “long” or “short”. If you are more time-pressed, patient and organised, then perhaps you are a swing trader. You would generally need to spend an hour or two checking your positions each day.

3. Position trading

This style of trading involves you holding your positions, either long or short, over an extended period of time. The long-term duration of your trades means you focus on longstanding market trends and themes. Minor price movements are less of a concern, and you will tend to have fewer open trades, potentially of a higher value.

This “buy and hold” strategy can be more akin to more traditional stock investing. Traders using this strategy will most probably be more patient and have time to research the market. They may only spend a few hours per week studying potential trade set-ups and identifying entry and exit prices.

What is Fundamental Trading?

This type of trading implies using both macroeconomic and microeconomic analysis to understand the effects of supply and demand. In turn, this will affect the value and price of assets. Examples include everything from central bank policy and geopolitical events to company earnings reports and balance sheets – basically anything you can think of which gives you information on an asset’s value and future direction.

Pros & Cons of Fundamental Analysis

  • Great for long-term investments as traders typically study the value of assets over a longer timeframe
  • Can give a deep understanding of the economy, sectors, and businesses
  • No need to study historic price action or technical chart indicators

Fundamental analysis often requires some in-depth knowledge of news reports or financial statements to form long-term and sustainable views. The results can also be complex and may not be suitable for traders who want quick results.

What is Technical Trading?

In contrast to the “why” of fundamental trading, technical analysis is interested in the “what”. By studying historic price movement and trends on charts, you can determine current and future trading conditions. The goal of technical trading is to recognise patterns which help find levels of support and resistance to define entry and exit points.

Pros & Cons of Technical Analysis

  • Use it across any timeframe or a combination of multiple timeframes – one-minute through to monthly charts
  • Establish clear risk management by knowing precisely where to enter and exit your trades
  • Can be applied in combination with other trading types like fundamentals, sentiment

Trading using technical analysis is not an exact science. There is no guarantee that previous price patterns will always determine future price action and traders can get mixed signals. That means a solid risk management strategy is prudent to protect yourself against unfavourable price action.

Conclusion

There are several different types of trading in stock markets. Finding a style that fits your financial circumstances, personality, emotional make-up and lifestyle is a big part of becoming a successful trader.

Styles differ on what type of analysis to use, how long you hold positions for and how much time you want to devote to the markets.

One key thing to remember is to be consistent – consistency in trading style will lead to consistency in results.

Disclaimer
Vantage does not represent or warrant that the material provided here is accurate, current, or complete, and therefore should not be relied upon as such. The information provided here, whether from a third party or not, is not to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any financial instruments; or to participate in any specific trading strategy. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. We advise any readers of this content to seek their own advice. Past performance is not an indication of future results whereas reference to examples and/or charts is solely made for illustration and/or educational purposes. Without the approval of Vantage, reproduction or redistribution of this information is not permitted.

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