I hope you’re having a great week!
Here in Florida, the water is finally warming up enough to take the boat out and enjoy my favorite activity — wakeboarding.
(Honestly, there’s only about two or three months out of the year that it’s just a little too chilly for my blood… perks of living in the Deep South!)
Anyway, we’ve had a lot of new people join the Prosperity Digest list over the past few months, so today I thought we’d go back to basics and talk about some trading fundamentals.
Specifically, I want to go over the key differences between a trading style and a trading strategy…
And what separates a winning trade strategy from all the rest.
Style vs. Strategy
First things first: what’s the difference between a trading style and a trading strategy?
To put it simply, your trading style determines how often you’ll place a trade…
And how long you’ll keep that trade open.
The trading style you choose will be based on several factors, like how much time you can dedicate each day to trading…
Your brokerage account size…
And your risk tolerance.
With that said, there are four major trading styles:
- Position trading
- Swing trading
- Day trading
- Scalp trading
The difference in these styles boils down to how long you hold a position.
For example, position trading is a long-term style in which you typically hold a position for months or even years.
On the other end of the spectrum, scalp trading involves holding a position for just a few minutes — or even seconds — in an attempt to take multiple small profits from dozens, or even hundreds, of trades throughout the day.
Swing trading and day trading fall somewhere in between the extremes of position and scalp trading.
So, what separates a trading style from a trading strategy?
As we’ve seen, your style dictates how often you will trade…
While your strategy determines when you choose to enter and exit those trades.
In other words, your trading strategy is the specific methodology, rules and analyses you base your trades on.
What Separates a Winning Trade Strategy from All the Rest
Of course, there are plenty of trade strategies out there.
Some of the most popular include trend trading…
Range trading…
Breakout trading…
And reversal trading.
These strategies all focus on different aspects of the market and use various tools and formulas to try and indicate which way a given price is going.
But all the strategies I mentioned above share one important thing in common…
They utilize what we call lagging indicators.
I’m talking about things like moving averages, MACD, stochastics, Bollinger bands…
The list goes on and on.
But here’s the thing…
We call them lagging indicators because they can only tell you what the market has done…
That is, where it’s been in the past.
But the reality is that historic data alone simply cannot tell you where the market is going.
… Only volume can.
See, volume can be interpreted in three main ways…
As selling pressure…
Buying pressure…
Or neutral volume, which means no pressure in either direction.
Of course, basic economics tells us that when buyers start entering a market in large numbers, it drives the price up…
And likewise, when there are more sellers in the market, prices will fall.
Now, when volume starts building up on a live exchange floor, it’s obvious.
If you’ve ever visited the NY Stock Exchange and seen the pit traders in action, you know what I’m talking about.
Of course, these days that’s much easier said than done.
But here’s what’s really cool…
There’s actually a way to replicate that advantage that the pit traders have from the comfort of your home trading station.
Want to learn how?