A trading style, not to be confused with a trading strategy, describes the way in which an investor makes their trades, the speed and frequency of transactions, the time for which positions are held open and consequently the type of asset and trade sizes they choose on the eToro platform. Trading style depends on many factors, such as the purpose of your trading activity as a whole, the amount of capital available, how much time you are willing to spend trading, the amount of risk you are willing to take, how quickly you want to make a profit and for how long you are willing to tie your capital in a single position. While a trading strategy describes the way in which you spot the desirable market conditions and also price levels, your trading style will define the time for which positions are held open and how often the trades happen. Below are a few things you might consider when you are deciding on what is the best trading style for you to use on the eToro platform as well as some of the most common trading styles.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
How to Choose a Trading Style?
Here are some questions you need to consider when choosing a trading style.
What is your investment horizon?
Are you looking for a long-term investment or rather short-term profiting such as day trading?
Perhaps your trading is short-term oriented and you are willing to have many positions opened and closed during the day for returns. Short-term trading it is very demanding in terms of time, research and monitoring and tends to employ high levels of risk and leverage. A trader involved in such a trading style needs to be good at quickly recognizing profit opportunities and engage in lots of risk taking.
Long-term investments are the complete opposite and require a trader to be patient and willing to tie up their capital for a long period of time.
At the end this choice is entirely up to you and your preferences for how quickly you want to generate returns, how much knowledge, training and available time you have and of course the actual purpose of your investment.
What type of assets are you going to trade?
The volatility and liquidity of assets you are trading may also indicate the style best suited to profit off these assets. Highly volatile liquid assets tend to be more suitable for short-term trading and can provide a return for those who know how to trade them, while less risky assets may be more suitable for long-term. At the end however, it boils down to the way in which you want to profit off these various securities.
- Stocks: stock prices are influenced by quite many factors, both company specific and the ones resulting from various surrounding economic conditions. Depending on your own preferences and choice of stocks they can be used for both day trading and long term investments.
- Cryptocurrencies and cryptoassets : the popularity of cryptoassets keeps increasing despite their relative volatility and risks, but they remain quite a controversial market. Their return and suitability for long-term investments largely depend on how widely they are used; bitcoin for example, is one of the oldest cryptoassets and is seen as a long-term investment by many, while newer assets are more volatile and quite risky for that purpose.
- Commodities: some commodities like gold are suited for long-term investments, while other more volatile and very liquid ones like crude oil tend to undergo many price changes in a day; at the end, the choice boils down to your personal purpose of trading them.
- Currencies: Currencies market is the biggest traded financial market in the world in terms of volume. Currency pairs are quite suitable for day trading as they are relatively volatile and liquid.
- Indices and ETFs: Exchange traded funds are instruments made up of several assets blended together and traded on the market like a single asset just like any stock. These funds usually adhere to a specific market strategy or track an index. Usually index funds are used for longer term investments as the funds they track are passively managed; ETF’s are used for both short-term trading because of their liquidity but they can also be held over a long time period.
Common Trading Styles
Below you can find the most common styles of trading based on the amount of time positions are held open for and the speed at which profits are taken.
Day trading or intraday trading is quite a broad term but generally refers to an active trading style where an asset is being traded (bought and sold) within a single day. The assets that are most commonly used for day trading are liquid stocks and currencies, but it can done in any market. There are many techniques and strategies used for day trading; scalping is a type of day trading, for example, but there are also news-trading strategy, high frequency and range trading etc. Day trading remains quite controversial as it is risky and can quickly result in large losses for traders with insufficient knowledge of the market, analytical abilities and little practice.
Traders that engage in scalping rely on making profits from small price movements in a large number of trades rather than focusing on a fewer large single trades. Scalping is a very short-term oriented fast style that profits off price misalignments generated by bid-ask spreads and also order flows. Holding time for a position is usually between a few seconds to several minutes (rarely hours, as day traders want to minimize risks; this style relies greatly on technical analysis and momentum indicators. Scalping often requires great discipline as traders need to close their positions after achieving desirable profits or maximum loss levels and require skilled use of leverage, stop-loss and entry/exit points.
Swing traders try to make a profit from the volatility of an asset at the end of a price trend and focus on short to medium term returns. Positions in swing trading generally last anywhere between a few days to several week and usually use a combination of both technical and fundamental analysis to be established. Traders aim to identify the potential future direction of price movement of an asset and make a profit from anticipated upswings or downswings accordingly, hence the name of the style.
Long-term investment (Position Trading)
As the name suggest, this trading or rather investment style relies on returns from long-term holding of assets, with positions kept open for as long as several years, that usually try to follow a trend. A position trader is not concerned with temporary short-term market changes (the complete opposite of a day trader) and rely on asset’s performance in the long-term. Many times position trading relies on fundamental analysis but technical analysis can be used too to identify long-term trends. A trader willing to implement this style of trading needs to be patien, accept low liquidity and willing to tie up their assets for a certain period of time
If you are really struggling finding a suitable trading style and strategy, copying a professional trader may be an option for you to make a return. This saves on time needed for active trading, monitoring and rebalancing your portfolio. You can always choose the trader who suits your own style, preference for assets and investment horizon the most from a wide selection on the platform.
Hopefully this article made the concept of a trading style more clear for you so now you can choose the one most comfortable for you and do your best in trading. Remember patience is key and good luck!
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