# Trading Methodologies

As you navigate the markets, and gain experience in trading, you will find yourself agreeing with some theories and strategies and disagreeing with others. You also may discover that there is certain pace that you’re comfortable trading at, or a specific way of trading that results in higher returns. Even though every trader has their own unique way of trading and thinking about the markets, we can group trading strategies into different categories.

# Scalping

This is a rapid-fire method that relies mostly on statistical indicators that help traders make sense of short-term movements in the price of a market. Scalpers will often try to derive information from charts in the ultra-short term and identify candlestick patterns that they find indicative of a specific price-action behavior. Scalpers will normally place an excess of 20 trades a day, holding each trade for only several minutes, and sometimes seconds. Most scalpers thrive in volatile markets, feeding off large swings in prices, and may trade around events such as earnings announcements, economic publications, and speeches. Scalpers stick to trading foreign exchange pairs, and cryptocurrency, however on trading platforms like Morpher it is easy to actively trade any market. Those interested in learning about scalping should research short-term momentum trading, and how to pick and interpret indicators.

# Daytrading

While loosely used, the term refers to any type of trading where trades are left open for less than a day. However, the methods used by day traders can vary greatly. Some day traders will trade only using fundamentals, sentiment, and demand and supply analysis. Others will use technical analysis to gauge what the market will do today. This is different from scalping because instead of moving in and out of the position quickly, day traders will normally allot time for the position “to play out” – prove their prediction right or wrong. Daytrading is common across all asset classes, and with the rise of commission free stock trading has become popular among average investors and traders. For would-be technical analysis pundits, Thomas N. Bulkowski’s Encyclopedia of Chart Patters is a must-read. Fundamentalist day traders will find online RSS feeds, hoot-n-holler radio shows, and a streaming twitter feed useful.

# Swing Trading

This style refers to holding positions for more than a couple days, but less than two weeks. This discipline will vary a lot depending on what markets are being traded. In stocks it’s more common to see swing traders using a fundamental approach in trying to gauge both the potential result of a catalyst, such as headline earnings on a report, and the resulting reaction of the rest of the market. For instance, a swing trader might analyze a stock that is due to report their financial results in a couple of days, and try to determine what investors and other traders are looking forward to most in the report, and how they will react if their expectations are met or if they are left disappointed. In commodity markets swing traders will try to gauge how the forces of demand and supply change over time, and how the price will reflect those changes in the future. In the forex markets, swing traders are more likely to adopt a technical approach, employing trend following indicators to capitalize on a medium-term price movement of a currency. In cryptocurrency, swing traders pay attention to both how the price moves, and why it moves, using a variety of different resources to help them reach their conclusions. Swing trading can be difficult in many ways for beginners because it requires a holistic understanding of the market and its participants. However, it’s not uncommon for a daytrader to slowly transition into the role of a swing trader as they learn to identify more long-term trends and shifts in sentiment. One of the most useful tools for a swing trader is an economic calendar, which details all major economic events.

# Position Trading

Position traders will pick their trades carefully, conducting a lot of research on political, macroeconomic, and sector-wide trends. Normally a position trader will hold their trade for more than a month, and sometimes more than a year. Their goal is to discover opportunities that the market has not yet priced-in. Position traders also like to get creative when it comes to doing their research and will also pay more attention to hedging their trades and accounting for a variety of possible scenarios. Overcoming the irrationality of markets can be a challenge for position traders, who spend a long time building a narrative that justifies their expectations. With the market under no obligation to be right, this leaves traders frustrated. Short-term traders have the advantage of requiring less information to justify exiting their trade early and recognizing a loss. However, position traders will take longer to gauge whether the market is on their side or not. A position trader might be losing money on their trade for months before finally generating a profit when the market reaches a “eureka” moment. Position trading works best for traders that have amassed an experience and understanding of how the markets work, leverage their personal know-how to make predictions for the medium to long term, and enjoy the researching and forming complex investment theses. Moreover, position trading requires less time actively staring at charts, and more time reading and learning.

Tip

This is the middle-ground between investing and trading.

# Quantitative Trading

In referencing technical analysis we discussed the use of statistical indicators as a means of interpreting the price history of a market, and how certain patterns can be indicative of future changes in the price. Most traders that use indicators as part of technical analysis will do so to gain a better understanding of what is happening in the markets, while still deciding what trades to make on a discretionary level. Quantitative trading aims to use more sophisticated mathematical methods to determine which trades to make. It’s an extension of simple indicator-based technical analysis that also incorporates elements of statistics. By relying on statistics the trader is able to make the most optimal choice, while having a full understanding of the risks they are taking, and their potential return. A step further is to apply this analysis in a reiterative fashion in the form an algorithm. With a bit of math, and some programming skills, even the average investor can build an automated trading strategy that will trade on their behalf by applying a set of rules (the strategy) objectively and reliably.