What Trading style should you use?
Before we start trading, we should think well what is what we are going to do.
We should “write down” some little rules about how long are we going to keep our trades; what our stop loss and profit taking should be. And most important, when, and how we are going to enter a trade.
There are several styles for trading.
Long term trading: Buy and Hold investing strategy
It is the most simple of all styles and perhaps, the best for the majority of people. Not everybody has the nerves to do swing trading.
However, the masses put their saving in bank accounts or houses (at least in Spain).
If the masses had the minimum financial education, they would place their saving in stocks for the long term.
The best strategy for this style is to buy stocks while you are saving, year after year.
You may buy stock indexes or sectors, for instance, the Nasdaq. There will be bad as well as good years for this strategy.
If we would have been saving by buying Nasdaq stocks the last 20 years, we would have had bad years like 2000, 2001 or great years like 1995, 1996, 2003, 2009, etcetera.
The key here is to invest in the index every year, so good years will compensate the bad ones and when finally a great bull market arrives the strategy will return impressive returns.
We must believe that the market will rise in the long run, like in the last two hundred years.
If the market does not go up anymore then we will be in serious trouble, and we will have other things to worry about.
The disadvantage of this style is that it is not flexible, and depending on the moment we start (think Japan 1989), it may be quite frustrating.
Medium Term Speculation strategy
It is probably the style I like the most.
This way of trading is very well described by the books of André Kostolany, the Hungarian speculator. He tells us that the best way to face the world of trading is to speculate in the medium term, from 6 months to 3 years, eventually 5.
The style is about buying stocks or sectors that have fallen a lot when everybody is selling (like 2008/2009). And sell them when everybody is buying and there has been a bull market mania for a while.
This style requires some fundamental, macro and intellectual analysis. It is basically a contrarian way of trading. George Soros and Jim Rogers do this sort of style.
Medium term speculation is not very welcomed by the brokerage industry.
Brokers are interested in day trading because it is the way they make their living. However, if you do this style, you will end up being a long term customer and will pay them commissions for many years to come (maintenance commissions). As for day traders, they will end up destroyed in a few months or years.
For Kostolany day trading was considered pathological gambling.
From my point of view, this is the most attractive style for traders. There may be different “swing” trading approaches. You can trade the trend, or you can try to chase a trend reversal, but the important fact here is to look for quality trades.
Trades may last from one day to months. For this strategy, we should use daily and weekly charts preferably.
If we use proper money management, we will be able to trade any asset, from stocks to forex, or futures. The stop loss order should be quite wide, from 1 to 4% or more. The profit taking should be as high as we want.
Day Trading style
This is without a doubt the most popular system between traders and the majority of those who sell systems, signals, books and else.
It is also the most recommended and promoted style by brokers, and for a good reason.
The more you trade, the more commissions; and the more commissions, more money for the broker.
As some brokers are market makers they will also win when their customers lose, so they will be very happy with this business.
The advantage of this style is that you go to bed without open trades. Also, it is supposed to return more profits due to the fact that we trade every day.
We hear ridiculous stories like: you can make 5000 $ from home investing 500$.
We should not hear our greed and these guys.
This style, as well as swing trading, is quite technical, which can be useful to identify some good trending trades. But the problem is that contrary to swing trading, day trading will give us a lot of false signals.
Moreover with day trading we should dedicate a lot more hours in front of the computer, and that is very stressful (unless you use an automated system).
What is the best trading style then?
If you believe most internet marketing and advertisements, you will end up doing day trading. Most day traders have tried day trading sometime. I did day trading too.
The majority of those who do day trading end up destroyed, financially and psychologically. There may be a few cases when some people do very well with day trading, but believe me, those cases will be a very tiny minority, and they will never sell you their system.
The best system for trading is probably swing trading (and simple technical analysis). With this system, there should not be the need of complex indicators or things. We should care about a few things: price, volume, money management, and not much more.
Long term investment is recommendable too, as a way of saving for the long run and creating our own pension.
Medium term speculation is quite hard to do and not made for everybody.
Not everybody is Jim Rogers.
As for day trading, the further you are the better.