Types of Trading

Traders utilize diverse trading strategies and styles rooted in their market beliefs and knowledge. The crucial aspect of trading is that what proves effective for one trader may not be suitable for another, leading to a wide array of trading processes.

Thanks to continuous financial innovation, the realm of trading has witnessed numerous additions, providing traders with a broader spectrum of options for selecting their preferred trading styles.

In essence, a trader's trading style often aligns with their psychological disposition. For instance, a reversal trader would encounter challenges in adopting a trend-following system, and vice versa. Therefore, it becomes imperative for traders to explore various trading approaches before discovering the style that resonates with their personality and beliefs.

In an effort to introduce the diverse trading methodologies, this blog delves into the various trading types categorized by strategies, timeframes, trade duration, analytical techniques, and asset classes.

• Based on Trading Strategies:

Momentum Trading:

Momentum trading is a strategy employed by traders who base their buying and selling decisions on recent price trends' strength.

In this approach, traders actively seek out stocks that have exhibited substantial percentage and volume changes over a specific timeframe, indicating a pronounced directional movement. They aim to capitalize on these price shifts by taking positions in such stocks.

Momentum trading strategies are designed to profit from purchasing stocks that are on an upward price trajectory while selling stocks that are experiencing a downward price trend.

Trading Based on Mean Reversion:

In contrast to Momentum trading, trading based on the concept of mean reversion operates on the premise that stocks deviating from their historical mean price will tend to revert back to that mean value over time.

Traders employing mean reversion strategies can take both long and short positions to profit from this tendency of stocks to revert to their mean. Unlike momentum strategies, which involve buying high and selling higher (in uptrends) or selling low and buying lower (in downtrends), mean reversion strategies aim to capitalize on the classic principle of buying low and selling high.

In summary, while momentum trading often leads to trades with a lower probability of success but higher profit potential, trading based on mean reversion typically results in trades with a higher probability of success but lower profit potential.

• Based on Timeframe: 

Scalping:

Scalping is a trading strategy where a trader aims to make small, quick profits by exploiting the bid-ask spread. Traders execute numerous trades throughout the day, swiftly entering and exiting positions in stocks or other asset classes. The goal is to accumulate a series of small profits that add up over the course of the trading day.

Day Trading:

Day trading involves the purchase and sale of a financial instrument within the same trading day, often with multiple trades executed throughout the day. Day traders capitalize on minor price fluctuations and ensure that all positions are closed before the market's daily closing. Day trading is characterized by its short-term nature.

Swing Trading:

Swing trading is a trading style that focuses on short- to medium-term strategies. Traders engage in swing trading by targeting liquid stocks or indices and taking advantage of price swings. These price swings may involve a return to the median price or a fade in a rally. Swing trades typically last from one day to a few days or even weeks.

Positional Trading:

Positional trading extends the duration of trades significantly compared to swing trading. Positional traders hold positions for periods ranging from a few weeks to several months or even years. This approach aligns more closely with long-term investing as traders aim to benefit from the overall upward trend in market structures over extended timeframes.

In general, the probability of success tends to increase as one moves from day trading to positional trading. This is because the longer-term market trends typically favor positional trades. However, each trading style has its own set of challenges and risk factors, and success in trading often depends on a trader's skills, strategies, and risk management techniques.

• Based on Analysis Technique: 

Technical Trading:

Technical trading is a trading approach that heavily relies on charts and graphs. Traders in technical analysis closely monitor price charts, examining lines, patterns, and indicators for signals of convergence or divergence. These signals inform their buy or sell decisions. Technical trading is primarily focused on the price action and historical data of an asset and is centered on technical analysis.

Fundamental Trading:

Fundamental trading is a trading method based on fundamental analysis. Traders using this approach analyze various factors such as corporate events (e.g., earnings reports, stock splits, acquisitions), economic indicators, and company financials to make trading decisions. Fundamental analysis is often suited for longer-term trades, as it aims to avoid short-term price fluctuations and focuses on the intrinsic value of an asset.

Techno-Fundamental Trading:

Techno-fundamental trading combines both technical and fundamental analysis. Traders employing this approach begin by shortlisting stocks based on fundamental analysis, considering factors like company performance and financial health. Subsequently, they use technical analysis to strategically determine entry and exit levels for their trades. This approach aims to leverage the strengths of both technical and fundamental analysis to make well-informed trading decisions.

• Based on Asset Class: 

Equity Trading:

Equity trading involves the buying and selling of company shares or stocks on financial markets, typically through stock exchanges or over-the-counter trading. It focuses on transactions related to public company shares.

Derivative Trading:

Derivative trading revolves around contracts whose value derives from underlying assets, which can include stocks, currencies, or indices. This form of trading involves the buying and selling of derivatives, enabling traders to speculate on the future price movements of these assets. Derivative trading tends to be more volatile than trading the underlying assets and includes instruments such as futures and options.

Currency Trading (Forex):

Currency trading, also known as forex trading, centers on the exchange of currency pairs. Traders engage in forex markets to buy and sell currencies against one another. Common currency pairs include EUR/USD, USD/JPY, and GBP/USD. The forex market operates around the clock, but liquidity and bid-ask spreads may vary.

Commodity Trading:

Commodity trading encompasses the buying and selling of various commodities categorized into four main groups: metals (e.g., gold, silver), energy (e.g., crude oil, natural gas), agricultural (e.g., corn, soybeans), and livestock/meat (e.g., cattle, pork). Traders in this market speculate on the price movements of these physical goods.

Crypto Trading:

Crypto trading involves speculating on the future price movements of cryptocurrencies in an effort to generate profits. It is a relatively recent addition to financial markets. Traders can engage in crypto trading by either speculating on prices using Contracts for Difference (CFDs) or purchasing digital currencies with the expectation of their value increasing over time. Popular cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP).