5 Types of Trading in the Stock Market

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 do stock trading is readily available for every trader, no matter their level of experience and expertise. 

Traders can choose to trade and invest in a wide range of companies on the US stock market, including well-known brands such as Apple, Amazon, and Tesla. Additionally, the US markets are regulated by the Securities and Exchange Commission (SEC) to ensure fairness and transparency for all investors.

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.  Whether you’re focusing on momentum trading or short-term trading, having the right approach is key.

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, influencing trading decisions.. 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 different trading types in stock market?

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

Day Trading

Day trading refers to a specific trading method in which traders buy stocks and sell them within a single day. Unlike long-term investors, day traders aim to capitalise on short-term price movements and fluctuations in the stock market. They leverage technical analysis, charts, and real-time news updates to make quick decisions, aiming to profit from small price gaps that can occur throughout the day. As the name suggests, day traders do not hold onto their stocks position overnight; instead, they close out their positions by the end of the trading day to avoid some of the risks and added costs of holding a position for more than a day

Pros & Cons of Day Trading:

• Traders can potentially achieve quick returns within a short time frame, often in a matter of hours or even minutes.
• Avoid the risk of market news or events that can affect the stock prices outside of trading hours.
• Day trading requires constant attention to the market. Traders must be prepared to make quick decisions, often under pressure, to capitalize on rapid price movements. This can be mentally and emotionally taxing, making it a stressful endeavour for many.

Swing trading

This strategy involves taking positions over several days or even weeks. Swing traders will hope to use short to medium-term price action and moving averages 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.

Pros & Cons of Swing Trading:

• Swing trading requires a lower time commitment, as trades are typically held open for a few days or even weeks. This relatively extended holding period allows traders to manage their time more efficiently and with less demand on their schedules.
• Risk of market news or events that can affect the stock prices outside of trading hours as the trading position are held open for a longer period.

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 long-term trading strategy is suitable for investors who are interested in building a diversified portfolio and who are looking to hold on to their investments for a more extended period.

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. 

Pros & Cons of Position Trading:

• Since traders make fewer trades, they incur fewer transaction costs. This means they save on commissions and other trading fees, which can add up over time and eat into their returns.
• Traders can capitalise on market movements that occur over a longer duration which can lead to potential returns for traders that correctly identifies a long-term trend.
• Traders’ capital is held for extended periods and will not be available for other trading opportunities

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 technical 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. 

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