Too many traders falsely assume that there is one “correct” style of trading and that in order to become successful, they must simply copy the trading style of another successful trader. The reality, however, is that no two successful traders share identical trading styles. Far from being a cookie-cutter approach to understanding and exploiting opportunities in the markets, a trading style is something inherently personal. Your trading style will reflect your preferences and strengths.
Successful traders develop their trading styles in order to specialize and gain expertise. Think of iconic basketball personality Dennis Rodman. While Rodman was a subpar offensive player, he excelled as a rebounder and defender and was thus a key contributor on many championship teams. Just as you will do in developing your trading style, Rodman focused on his strengths instead of trying to blindly mimic others.
A large determinant of your ultimate success as a trader will depend on your ability to develop a trading style that speaks to your strengths. Use the following five questions as starting points in finding and defining your own personal trading style:
1. Which Stocks Do You Like To Trade?
Stocks have different characteristics and behave differently based on their price, volatility, and liquidity. Your choice of which stocks to focus on will play a big role in determining your trading style.
Some traders prefer trading volatile low-priced stocks, while others focus their attention on high-flying stocks such as AAPL or PCLN. Some traders prefer focusing on stocks in a particular sector, while others will stock-hunt throughout the day in order to find good stocks. Use your trading results to determine which stocks you have success trading and which stocks you should avoid.
2. How Long Do You Hold Your Trades?
Another key component of your trading style is how long you hold your average trade. Some traders prefer taking advantage of quick, small movements in stocks and thus adopt a scalping style, holding positions from a few seconds to a few minutes. Others take a longer-term position trading approach and hold trades for many hours, seeking to take advantage of extended price movements.
Your holding time will also affect how you view trading opportunities as well. Scalpers might find opportunities in stocks that position traders may avoid, while position traders might find opportunities on a longer timeframe than a scalper would look at.
3. What Causes You To Enter A Trade?
While experienced traders will have a playbook of trades that they use, developing traders should focus on a few setups that make sense to them. These core setups will be a key element in your trading strategy.
For example, some traders focus on buying strong stocks when they pull back to trendlines. Others may prefer trading breakout or breakdown trades, seeking to take advantage of the resulting momentum. Still other traders may prefer counter-trend trades to play a reversion to the mean.
Whichever core setups you focus on, you’ll be scanning through your universe of stocks looking for those opportunities. Be sure your core setups make sense to you and that you know how to execute them efficiently.
4. How Do You Manage Your Positions?
Your position management techniques will also play a role in determining your overall trading style. Remember that trading isn’t simply a binary buy/sell decision and that position management skills will allow you to maximize your profits on winning trades while limiting your downside on losing trades.
You should determine how you will decide your position sizes for your trades, as well as what factors will cause you to add size on a winning trade. Some traders prefer establishing smaller positions and then only increasing their size while in the money, while others prefer trading larger initial positions and not adding on during trades.
5. How Do You Exit Your Positions?
Just as your entry criteria play a role in your overall trading style, so too does how you exit your trades. In fact, this may be the area most developing traders overlook as they’re so focused on finding ideal entry points for their positions.
You may find that you prefer exiting your trades all at once when a given profit target is hit, or perhaps you may instead prefer to get out of a portion of your position for a scalp while holding on to the rest for a position trade. You can see how your exit preferences will also affect your average holding time as well.
Summary
While this isn’t a complete overview of all the components that will make up your trading style, these five questions will help you to narrow down your strengths so that you can focus your attention on them. Finding your trading style should be a natural process of reviewing your results and continuing to do what works for you, while eliminating what doesn’t. While it’s always wise to work on your weaknesses, developing traders progress along their learning curve when they find a trading style that emphasizes their strengths.
By Matt Nadell | www.tradecrushers.com | Twitter: @TradeCrushers