Financial Literacy

Which Style of Trading is Right for You?

Chief Income Strategist Marc Lichtenfeld explains why day trading isn’t for everyone. He shows how to find the best trading strategy for you based on your risk tolerance. There are options out there for every investor – and many of them are becoming more accessible by the day.

I can remember every detail about my first trade 30 years ago. Sitting on my living room floor, with my heart pounding in my chest, I called a broker at Waterhouse Securities. (There was no internet. You had to talk to a broker. And Waterhouse Securities no longer exists.)

I glanced at the research in my lap one last time as I nervously told the broker to buy 50 shares of Harley-Davidson at $12 a share. Keep in mind, I was making about $400 a week before taxes and living in Manhattan, so $600 was a fortune to me.

Three months later, I victoriously called Waterhouse Securities again and instructed the broker to sell my 50 shares at $18. Keep in mind, I had to pay a $49 commission each way and, of course, pay taxes. So after all was said and done, I probably cleared a $175 profit.

But I was hooked.

Because of my financial constraints, I wasn’t a very active trader. I picked my spots, and like all new traders, I paid a costly tuition to learn how to trade and invest properly. But over time, I got better.

Then, I went to work for a day trading firm. This was trading on steroids.

How I Learned Day Trading Isn’t for Everyone

I was an assistant on the trading desk. It was my job to execute all the trades (traders didn’t have the software to do it themselves back then) and reconcile the books.

All day long, traders would shout at me to buy Intel at 34 5/8 and to sell Cisco at 42 and 9 “steenths.” (A steenth is a sixteenth of a point. They used fractions instead of decimals back then.)

I was amazed at how these traders could watch price action and know just when to get in and out.

I tried it. Day trading was not my strength.

As my career progressed, I learned what type of trading suited me best. I enjoyed swing trading, which is where you enter a trade for typically a few days to a few weeks.

I personally found the most success when my timeline was a little longer – a few weeks to a few months.

Which Trading Strategy is Best for YOU?

That’s where I get my largest gains. But every trader is different. Some, like my friends at the day trading company many years ago, make a great living darting in and out of the market all day long. Others need a longer holding period.

If you are new to trading or are reassessing the style that suits you best, here’s a guide to help you…

Day trading – This is for action junkies who love watching their stocks and the market all day, but do not want market risk overnight. Day traders exit most of their positions before the market closes. They typically watch price action to decide when to get in or out.

Swing trading – This is not as intense as day trading. You don’t need to be glued to your screen all day, but you still have to pay attention, as entries and exits can happen at any time. Swing traders typically use technical analysis or quantitative tools to trigger trades.

Longer-term trading – This is not to be confused with investing. These trades take time to develop, but when they work, they can lead to huge gains as you let your winners run. Still, use a stop to ensure your losses stay small and you don’t let winners become losers.

These trades usually last a few months. Trade ideas can come from technical or quantitative signals as well as fundamentals or news flow.

Long-term investing – In this strategy, investors typically hold positions for several years or longer. They don’t watch the market all day or worry about each tick higher or lower in their stock.

Ideas are usually generated from fundamentals, though technical analysis may be used to enhance timing. Long-term investing produces great returns over the long term, but it is susceptible to short-term fluctuations.

It took me a long time to figure out the right style for me. If you’re new to trading, think about which style best suits your personality and tolerance for risk. Having considered those things ahead of time should put you on a faster path to success.

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About

A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.

 

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