15 Types Of Trading: Choose Your Style

15 Types Of Trading: Choose Your Style

Financial markets are a crucial part of the global economy.

All around the world, people use them to buy and sell everything from stocks and bonds to currencies, commodities, and derivatives.

Saqib Iqbal 146 Updated:

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Financial markets provide a way for people to invest money in assets and earn a return on their investment.

But what exactly is trading?

In its simplest form, trading is the process of buying and selling assets in the hope of making a profit.

A while back, I used to think that trading was a fairly straightforward concept: you buy something cheap, then sell it at a higher price.

However, as I gained more experience in the financial markets, I realized more about trading than just buying low and selling high.

There are many different types of trading techniques and strategies, and each has its own particular set of risks and rewards.

Therefore, when looking at the different types of trading, you must first decide what kind of trader you want to be.

Are you looking to take a short-term view and trade based on market momentum, or are you more interested in taking a long-term view and investing in companies that you believe have sound fundamentals?

This decision boils down to your psyche.

What’s your personality and risk tolerance?

Do you like the excitement of fast-paced trading, or are you more comfortable with a slower, steadier approach?

Once you’ve decided on your trader persona, you can begin to look at the different types of trades that might suit your style.

Investopedia shows that experienced traders can earn up to 19% return or more on their investment, while beginners tend to incur losses.

With the right approach, trading can be a very profitable activity.

In this comprehensive roundup, I’ll help you get acquainted with the most common types of trading based on some key parameters:

  • Trading strategies
  • Timeframe and length of period the trade is open for
  • Analysis technique based on the trade
  • The asset class traded

These are the same parameters that other professional traders and I use to evaluate a trade before taking their position.

So, whether you’re a beginner or an experienced trader, this overview of the different types of trading will surely give you some insights on which approach might work best for you.

Lets’ get started.

What Are The Different Types Of Trading Based on Trading Strategies?

What Are The Different Types Of Trading Based on Trading Strategies?

momentum-trading

Strategy refers to the specific actions to enter and exit a trade.

It’s the “game plan” that traders use to determine when to buy or sell an asset.

A trading strategy is what separates the best traders from the rest.

A trading strategy should consider your risk tolerance, investment goals, and market view.

It should also consider the different types of orders to enter and exit trades.

While there are many possible trading strategies, the most common Types Of Trading Based on Trading Strategies are momentum trading and mean reversion trading.

  1. Momentum trading 

Momentum trading is a technique that tries to take advantage of the speed or momentum of price movements.

Momentum traders believe that prices that have been rising (or falling) are more likely to continue in that direction than to reverse.

They buy (or sell) based on this belief and then close their positions when they see signs of slowing momentum.

Traders who like to take a more active role in their trades tend to use this type of strategy, as it allows them to place many buys or sell orders throughout the day based on market conditions.

For example, a momentum trader may buy an asset when the price increases rapidly and sell it when the price drops.

Think of it as the momentum of a train: when a train starts moving, it’s hard to stop, especially once it gets up to speed.

But eventually, it will slow down and stop as its momentum dissipates.

Likewise, momentum traders believe that once a stock or other asset moves in a particular direction, it will be difficult to change course and head in the opposite direction.

Momentum traders tend to operate on short timeframes (from a few days to a few months) and often hold their positions for only a few weeks or even days.

  1. Mean reversion trading 

This type is the opposite of momentum trading and takes advantage of periods when prices move back towards the mean or average price level.

Whereas momentum traders believe that prices that have been rising are more likely to continue growing, mean reversion traders believe that prices that have been rising are more likely to fall back towards the mean.

Mean reversion trading is the idea that prices constantly moving in one direction will eventually return to their starting point.

I love looking at it this way.

Imagine standing on a see-saw, and the opposite end has been sitting up in the air for some time.

You know very well that it will come crashing down at some point.

Reversion trade is all about—waiting for an asset to “crash back down” and buying it when that happens.

There are many different possible approaches to mean reversion trading.

Still, the most common is buying an asset when the price falls below a certain level and selling it when the price rises above that level.

For example, suppose a stock X or other asset Y has risen steadily over the past few months.

In that case, mean reversion traders might expect it to fall back down eventually and begin selling short (or going long) when they see signs of price weakness.

Mean reversion traders often hold their positions for weeks or months and may use technical indicators to help them identify periods when prices are due for a reversal.

Further reading
How Can You Trade Based On Timeframe?

How Can You Trade Based On Timeframe?

thinking-of-a-day-trader

Suppose your prototypical vision of a “trader” consists of someone hunched over a half-dozen screens, rapidly buying and selling assets throughout the day.

In that case, you’re thinking of a day trader.

But not all traders operate on such short timeframes.

Some traders may hold their positions for days, weeks, months, or even years!

I believe these higher time frames allow you to eliminate “market noise” and catch the big and “tasty” price swings.

The timeframe and length of period that trade is open for can vary widely depending on the trader’s goals, risk tolerance, and level of expertise.

For example, a day trader may hold positions for only a few hours or minutes before closing them.

A swing trader might keep their positions for a couple of days before closing them out.

And an investor may be in the market for weeks or months at a time before closing the position.

The length of time a trader holds a trade can affect their strategy and approach to analyzing market conditions.

Here are some examples of different types of trading based on timeframe and length of trade:

  1. Scalping 

I usually describe scalping as “trading in fast forward.”

When scalping, you’re taking small profits quickly and exiting positions immediately.

While I don’t encourage this type of trading for new or less experienced traders, it can be a practical approach for those who know what they’re doing.

Scalping is a trading technique that involves opening and closing many positions in quick succession within the same day.

The goal is to catch small price movements, often in response to news events or technical indicators for pure speculation based on market momentum.

Traders who use this strategy aim to profit from the bid-ask spread- the difference between the prices at which a currency can be bought or sold.

Scalpers typically hold their positions for only a few minutes or even seconds and may use high leverage to maximize their profits.

This trading style requires liquid markets, fast execution, and a strong stomach for risk since even small price movements can lead to significant losses if the positions are not carefully managed.

Most scalpers tend to focus on highly liquid stocks and major currency pairs with high daily volumes, such as GBP/USD, USD/JPY, and EUR/USD.

  1. Day trading 

Have you ever received an email, seen a tweet, or heard about a stock that was up big in the last hour?

Or maybe you’ve seen a stock price flash across your screen and wonder how it got there so fast.

If so, you may have encountered day traders.

Day trading may be a better option for the types of traders in the stock market that are not comfortable with scalping.

Day trading is the act of opening and closing positions within the same day.

The main difference between scalping and day trading is that day traders will usually only take one or two trades, whereas scalpers might take ten or more.

It means that day traders have more flexibility in their timeframes and can potentially make more enormous profits if they accurately predict short-term price movements.

How to be successful at day trading?

First, it is vital to understand technical analysis and robust risk management skills since even small price fluctuations can lead to significant losses if not managed properly.

  1. Swing trading 

Forget about day trading and scalping-if you want to hold your positions for more than a day, swing trading may be the right approach.

type-of-trading

This type of trading is between day trading and long-term investing, keeping positions for a few days to a few weeks.

The goal is to capture medium-term price movements, which can be difficult if only looking at short-term charts.

Swing trading often uses technical analysis to identify periods of potential price momentum, but it can also be used for pure speculation based on market sentiment.

This trading style can be profitable if you can accurately predict where prices are headed in the near term.

Still, it can also lead to significant losses if your predictions are inaccurate.

Some of the most popular indicators used by swing traders include moving averages and Bollinger bands and technical analysis tools like MACD (Moving Average Convergence Divergence), Relative Strength Index (RSI), and stochastic oscillators.

  1. Position trading 

Long-term stock investors such as Warren Buffett are considered to be position traders.

However, position trading is perhaps the least active form of stock trading, as positions are typically held for months or even years.

Position trading is a longer-term approach to trading that takes a more macro view of the markets.

The goal is to profit from more significant price movements over weeks, months, or even years.

This type of trading often uses fundamental analysis to identify opportunities and technical analysis to time entry and exit points.

Position traders often hold their positions for extended periods and may use stop-loss orders and limit orders to help manage their risk.

Because this trading style requires less day-to-day monitoring, it can be a good option for those who want to diversify their portfolio beyond short-term strategies.

Position traders hold their positions for extended periods and are not concerned with minor price fluctuations and pullbacks.

As a result, they can often make more significant profits from their investments.

However, this does come with higher risks since a substantial price movement in the wrong direction can lead to huge losses.

Further reading
How Can You Trade Based On Analysis Technique?

How Can You Trade Based On Analysis Technique?

trading-decisions

Most professional traders I know use some form of analysis when making their trading decisions.

You know, the kind that involves looking at charts, interpreting signals and trends, and using a variety of indicators to identify potential trading opportunities.

While it is certainly possible to make money trading without any analysis, those who are most successful typically understand how prices move and which types of approaches are likely to be profitable in various market conditions.

So if you are serious about trading, it is important to study different analysis techniques and find one that works best for you.

It could be anything from examining simple price patterns and support/resistance levels to more advanced technical indicators like Bollinger Bands and moving averages.

The analysis is an in-depth study of price action to identify market trends and trading opportunities.

Why is this important?

The goal of the analysis is to help you make more accurate predictions about where prices are headed so that you can enter and exit trades accordingly.

There are two main types of analysis: technical analysis and fundamental analysis.

Each has its strengths and weaknesses, so it’s essential to understand their differences before deciding which one to use.

  1. Technical analysis trading

Technical analysis is a popular trading technique that involves studying charts and price patterns to identify potential market opportunities.

This type of analysis uses price indicators, moving averages, and momentum oscillators to help traders predict short-term price movements based on past market data.

Many technical traders use support and resistance levels to identify potential trade entry and exit points and stop-loss orders to manage their risk.

Technical analysis can be used for day trading, swing trading, and even long-term position investing.

  1. Fundamental analysis trading 

Fundamental analysis is another popular trading technique that uses economic indicators and events to identify trading opportunities.

This type of analysis looks at factors like a company’s financial stability, earnings reports, stock splits, and macroeconomic conditions to try and identify potential investments.

Long-term investors often use fundamental analysis. Still, it can also be used for short-term trades if you can accurately predict how a particular event will affect prices.

  1. Techno-fundamental Trading

Techno-fundamental trading combines both technical and fundamental analysis to try and identify the best opportunities in the markets.

Traders who use this approach often look at economic indicators to identify potential long-term trends and then use technical analysis to time their entry and exit points.

This type of trading can be profitable if you can accurately predict which factors will significantly impact prices in the near term.

However, it also comes with higher risk, as any unexpected events or changes in market conditions can lead to significant losses.

  1. Sentiment analysis trading 

Sentiment analysis is a type of trading that looks at market sentiment to identify potential opportunities.

This technique involves studying investor behavior and using that information to try and predict future market movements.

Further reading
What Do You Understand About Asset Class Trading?

What Do You Understand About Asset Class Trading?

asset-classes

Well, asset classes are a bunch of securities that fall into different categories based on their risk and return profiles.

These include stocks, bonds, commodities, currencies, real estate, and more.

Each asset class typically has its unique trading strategies and risks involved, making it essential to understand the differences between them before deciding which one to invest in.

Forbes explains it like this, “Asset class trading is an investing and trading strategy that aims to profit by buying and selling different asset classes to take advantage of the unique characteristics of each one. Traders use this type of trading to hedge against market volatility, diversify a portfolio, or profit from the differences in the performance of different asset classes.”

Some of the most common asset classes include:

  1. Equity/Stock trading 

Stock trading involves buying and selling shares in publicly traded companies.

This type of trading can be done through online brokers or traditional investment firms, and it allows investors to participate in the growth of companies around the world.

Many factors can impact stock prices, including company earnings, financial performance, and investor sentiment.

Because of this, stock trading requires careful analysis to identify the best opportunities and risks in the markets.

  1. Currency/Forex trading 

Forex trading is a popular form of trading that involves buying and selling currency pairs on an exchange.

This type of trading allows investors to take advantage of the fluctuations in currency prices to make profits.

For instance, EUR/USD is a popular currency pair representing the euro and U.S. dollar.

When the EUR/USD price goes up, the euro gains value against the dollar.

Conversely, when the price goes down, the dollar gains value against the euro.

Forex trading can be done through online forex brokers or traditional forex firms, and it requires careful analysis to identify the best entry and exit points in the markets.

Since currency trading can be a very volatile market, there is a high risk involved. Investors can potentially lose a lot of money if they don’t carefully manage their positions.

Some of the critical factors to consider we include economic indicators, geopolitical events, and central bank policies when doing forex trading.

By analyzing these factors, you can identify potential market opportunities and risks to make more informed decisions.

  1. Commodity trading 

Commodity trading is a type of trading that involves buying and selling commodities like gold, silver, oil, and agricultural products.

This form of trading allows investors to participate in the global price fluctuations of commodities, and it is typically done through online brokers or traditional commodity firms.

Like other types of trading, several factors can impact the prices of commodities, including global demand, shifts in supply, geopolitical events, and government policies.

Therefore, investors who engage in commodity trading must carefully analyze these factors to identify the best opportunities and risks in the markets.

If done correctly, commodity trading can be a very profitable investment, but it also comes with high risks and requires careful risk management to minimize losses.

  1. Cryptocurrency

crypto-trading

Crypto trading is a relatively new type of trading that involves buying and selling cryptocurrency tokens like Bitcoin, Ethereum, Tether, and Litecoin.

This form of trading has become very popular in recent years due to the rise of blockchain technology.

Crypto traders and investors try to take advantage of the fluctuations in crypto prices to make profits.

However, like other types of trading, there is a high degree of risk involved in crypto trading.

Investors can potentially lose a lot of money if they don’t carefully manage their positions.

Factors that can impact crypto prices include global news, government regulations, and changes in the underlying technology.

By analyzing these factors, traders can identify opportunities and risks in the markets to make more informed decisions.

HODLing is a crypto trading strategy that involves buying and holding onto cryptocurrency tokens for an extended period, regardless of market conditions.

This strategy is based on the belief that the prices of cryptocurrencies will eventually go up in the long term, so holding onto them for an extended period will allow you to profit.

It is crucial to understand the underlying technology and the factors that can impact prices.

Crypto traders must also manage their risks carefully to avoid potential losses.

  1. Art trading 

Art trading is a type of trading that involves buying and selling fine art, such as paintings and sculptures.

This form of trading allows investors to participate in the global art market, which can be lucrative for those knowledgeable about art and identify suitable investment opportunities.

Many factors influence art prices, including trends in the broader economy, demand from collectors, and art supply.

To be successful in art trading, you must carefully analyze these factors and identify opportunities to make more informed investment decisions.

Art trading is a specialized form that requires knowledge and expertise in the art market and good risk management skills to avoid losses.

Further reading
How Can You Decide on The Best-fit Trading Style?

How Can You Decide on The Best-fit Trading Style?

As we’ve seen, there are different types of traders in the stock market, each with its strategies, goals, and styles.

So how do you decide which type of trader you should be?

Well, here are some things to consider:

  • What are your goals? Are you looking to make a quick profit, or do you want to build a more long-term investment portfolio? Are you interested in creating a portfolio of stocks that will generate long-term income?
  • How much capital do you plan to start with? Different types of trading require different amounts of capital, so you’ll want to make sure that you have enough money to get started.
  • What is your level of risk tolerance? Do you prefer taking calculated risks or playing it safe? Each type of trading comes with its level of risk and volatility, so be sure to choose a style that matches your comfort level and willingness to take risks.
  • How much time are you willing to commit to trading? Do you want to be a full-time trader or only trade part-time? Depending on your schedule and other commitments, you may want to focus your trading activities around a specific type of trading.
  • What type of personality do you have? Do you like the excitement of day trading or the more systematic swing trading approach?
  • What is your level of expertise? Are you a novice trader, or do you have years of market experience? If you’re a beginner, you’ll want to choose a more straightforward and less risky style. As you gain more experience, you can begin to explore more complex strategies.
  • What instruments would you like to trade? For example, do you want to trade stocks, options, futures, or other financial instruments? Or are you interested in trading cryptocurrencies?
  • Are you able to stick to a plan and control your emotions? Trading is not just about understanding the markets and picking good trades. It’s also about having intense discipline and emotional control.
  • Answering these questions can help you narrow down the type of trader that best suits your needs and goals. It is important to remember that there is no one right way to trade and that different traders can succeed using various strategies. So choose the approach that feels right for you and commit to it.

Ultimately, choosing the right trading style comes down to understanding your own goals and risk tolerance and the time and capital you have available.

Further reading
The Bottom Line?

The Bottom Line?

If you are looking to get involved in trading, there are many different options available depending on your goals, risk tolerance, and experience level.

It is crucial to find a style that suits your personality, psyche, and investment goals, from scalping, day trading, and swing trading to position trading.

In most cases, how many trading types you choose to use will depend on your overall trading strategy and risk management approach.

Whether you are trading in forex, commodities, cryptocurrencies, or another type of asset, it is vital to understand the markets and the various factors that can impact prices.

Additionally, successful traders must manage their positions carefully and minimize losses to maximize profits.

With the right tools, knowledge, and preparation, you can succeed in trading no matter which type of market you choose to engage with.

Remember: There is always something new to learn and opportunities in the markets, so keep an open mind and stay focused on your goals to achieve success!

Further reading