To be a successful trader you need to find a “Trading Style” which suits you “THE BEST” , in terms of risk appetite, stress,money management. A trader who is not comfortable with his trading style or has not found trading style are the one who commits the trading sins and blow of their trading account.
Trading can be broadly classifies into:
- Day trading
- Swing trading or Positional Trading.
- Automated Trading
Let’s define these terms:
- Day Trading is also known as ‘Intraday’. It means opening and closing a position within the same trading day. Traders who are interested in scalping,quicker and smaller profits and trading on leverage and who can make multiple trades per day work on this strategy.
- Swing Trading means that you are trying to take advantage of larger price swings in the markets. Traders will carry positions for few days to 2-3 weeks. Trades can be taken based on Gann/Harmonics/Price Action trading methodology to find swing trades.
- Automated Trading – Another approach for traders short on time, or trading in their spare time, is automated trading. Traders merely set their entry and exit criteria along with the size of the trade and allow the market to do the rest.
So which trading approach is better – Swing trading or day trading? Traders can look to either day trade or swing trade, the benefits and drawbacks are different with each. Understanding the differences in risk, rules and goals is important when deciding how to trade on a particular trading style.
Day Trading Advantage:
- Risk is in Control if you follow “ Stoploss“
- Profit is small.
- Traders can use the Over leverage upto 10-20 times provided by brokers
- It is presumed you can make fast money, from my experience opposite holds true 🙂
- Gives you no tension of carrying overnight positions
- Allows you to always be actively participating in the market
- Positions are closed by end of trading day so overnight unexpected news will not affect your trading account
Day Trading Disadvantage:
- Overhead cost are more, STT , Turnover tax commissions eat away most of profits.
- You can lose money faster much much faster if you are not knowing the traits of the game.
- Time consuming – very difficult to trade properly if you have a full-time job.
- Success Ratio is very less, As per stats only 5% traders become successful in long run.
- Extremely Risky! Traders can lose a substantial amount of money in a very short period of time.
- Fast pace & necessary concentration can make day trading very stressful.
- Money management,Discipline and a profitable system are a lot more important when day trading.
- Even a small mistake can result in a huge loss.
Swing Trading Advantage:
- Swing trading gives you time to allow the move you’re anticipating to actually occur.
- It helps in Managing Stop loss and Profit target.
- Success Rate is quiet high when compared to Day trading as you give time to your trade.
- Not necessary to “Baby Sit” your trades, less time involved in active trading.
- Can be worked around a regular job – a couple of hours per day should suffice.
- Less stressful than intraday trading.
Swing Trading Disadvantage:
- Trader will find difficult to learn and become profitable in initial phase of trading career.
- More time is required in analyzing charts and preparing trading plan.
- Trader must review his open trading options once in a day.
- Trader need to fight “Emotional Attachment” to the trade.
- Most of trader will keep searching for tops and bottoms or reversal for taking the trades and mostly go wrong in initial phase of trading career.
- It is not uncommon to exit on a retrace or trend change only to have the market immediately change back and head in the original direction.
- No Control over overnight positions.
- Traders will not be able to use leverage provided by Brokers ( Professional traders will consider this as an advantage.)
Advantages of Automated Systems
Automated trading systems minimize emotions throughout the trading process. By keeping emotions in check, traders typically have an easier time sticking to the plan. Since trade orders are executed automatically once the trade rules have been met, traders will not be able to hesitate or question the trade.
Convenience and speed: Mechanical systems like robo-advisors are accessible to traders with different levels of experience. Because of automation, trades have also become exponentially faster compared to previous decades. Being able to react automatically to sudden market changes is a huge trading advantage
Disadvantageof Automated Systems
Monitoring Although it would be great to turn on the computer and leave for the day, automated trading systems do require monitoring. This is because of the potential for technology failures, such as connectivity issues, power losses or computer crashes, and to system quirks.
- Tech dependence: Automation, however intelligent, is not foolproof. Experts predict that failure of trusted algorithms is bound to happen — and this can result in a ‘series of cascade failures’ for financial institutions of every scale. It already happened during the trillion-dollar stock market crash of 2010, which was a result of an algorithmic error.
Even for small scale trades, a slow internet connection can already be disastrous. Trading occurs in a fast-paced environment, and a reliable technology infrastructure is crucial for staying ahead of the curve.
Mechanical Failures The theory behind automated trading makes it seem simple: Set up the software, program the rules and watch it trade. In reality, automated trading is a sophisticated method of trading, yet not infallible. Depending on the trading platform, a trade order could reside on a computer, not a server. What that means is that if an internet connection is lost, an order might not be sent to the market. There could also be a discrepancy between the “theoretical trades” generated by the strategy and the order entry platform component that turns them into real trades.
Which style appeals to you? Which are you now actively trading?
BEING CONSISTENT WITH YOUR TRADING STYLE
Consistency in trading style will lead to consistency in results. Altering styles when trades are not favourable is a common mistake with novice traders. Judgement should not be handed after limited trades, because not every trade is successful. If the trading strategy is sound with proper risk management, sticking to it should provide the desired results.