Types of trading

There are five main types of trading available to technical traders: scalping, day trading, momentum
trading, swing trading and position trading. Mastering one style of trading is very important, but the
trader also needs to be proficient in others. If in doubt, stay out of the market. Standing aside is
considered a defensive position, and there’s nothing wrong with waiting for an opportunity.

Scalping
Scalping (or micro-trading) is all about taking very small profits, repeatedly. Typically, trades last from
seconds to minutes. Scalping is a trading strategy that attempts to make many profits on small price
changes. Traders who implement this strategy will place anywhere from 10 to a few hundred trades in a
single day in the belief that small moves in stock prices are easier to catch than large ones.
Scalping is an expert skill and, although many people find the idea attractive (and exciting for adrenaline
junkies), I wouldn’t recommend it for beginners.

Day trading
Day trading is all about buying and selling on the same day, without holding positions overnight.
Compared to scalping, this style calls for holding positions for minutes to hours versus seconds to
minutes. A day trader closes out all trades before the market closes. Most day traders use leverage to
magnify the returns generated from small price movements.

Day trading is often glamorised as an easy way to get rich quickly. However, this is rarely the case. Day
traders typically suffer severe financial losses in their first months of trading and many never graduate
to profit-making status. Day traders are handicapped by the bid-ask spread, trading commissions and
other expenses. These costs require day traders to earn significant trading profits just to break even.
Both scalping and day trading require strong discipline; the time and ability to learn how to trade a
tested and profitable strategy rapidly; and enough capital to withstand sudden and, possibly, larger-
than-expected losses.

Both scalping and day trading are what is known as intraday trading. If you buy and sell shares in a single
day, then you are considered to have traded intraday. An intraday trader opens (buys) and closes (sells)
their trades (also called positions) within the trading day, leaving no trades open overnight.

Momentum trading
In momentum trading, the trader identifies a stock that is “breaking out” and jumps on to capture as
much of the momentum on the way up or down as possible. They focus on stocks that are moving
significantly in one direction on high volume. The typical time frame for momentum trading is several
hours to several days, depending on how quickly the stock moves and when it changes direction.

Swing trading
Swing trading is the art of capturing the short-term trend. It is a style of trading that attempts to capture
gains in a stock within one to seven days. Swing traders use technical analysis to look for stocks with
short-term price momentum. These traders are not interested in the fundamentals or the intrinsic value
of stocks, but rather in their price trends and patterns.
In my opinion, swing trading and position trading are the only two types of trading in which a person
with a full-time job can still consistently trade well part-time. Since the holding period is several days,
intraday moves will not affect the swing trader as much as they would a day trader. A typical holding
period for a swing trade is three to seven days.

Position trading
Position traders stay in trades for weeks to months. The position trader endeavours to anticipate
whether the current trend will continue for a much longer term than a momentum or swing trade.
Position trading gives traders who cannot trade frequently a lot of freedom: profit potential is not
diminished and position traders can make considerable gains. Long-term traders are not concerned with
short-term fluctuations, because they believe that their long-term investment horizons will smooth
these out. Position trading is the polar opposite of day trading, because the goal is to profit from the
move in the primary trend, rather than the short-term fluctuations that occur from day to day.