Once you’ve explored the world of trading for a bit, it’s time to start narrowing your focus. A successful trader should not attempt to catch every single play and trade every single stock. Think of the 80/20 rule: the majority of the results will come from a small amount of the efforts. Focus on which efforts will yield the best results. Different traders will prefer different trading styles, and people profit using all different kinds of strategies. You need to choose a trading style that plays off of your strengths and provides you with the highest chances for success.
Here are some things you will want to focus on when developing your trading style.
What timeframe do you want to place trades in? Are you looking to be in and out of a trade within the day or do you want to hold a stock for days or weeks? It’s important to choose a timeframe because this will dictate the setups you are looking for. A profitable intraday trading setup may not prove to be profitable for a swing trader looking to hold the stock for a few days, and vice versa.
When choosing a timeframe, you need to focus on your strengths and restrictions. For example, if you have a 9-to-5 job, you may not be able to handle the pressure of buying and selling a stock within a few hours. Contrarily, if you’re trading with a small amount of capital, you may not have the patience to hold stocks for days or weeks at a time. There is no ideal timeframe. Simply, focus on a time frame that makes sense for you.
Types of Stocks
Not all stocks are exactly the same, and they all follow different patterns. Some things that may differentiate a stock is its price, the industry of the underlying company, and the stock exchange the equity trades on. Once again, there is no right or wrong type of stock to trade.
For example, a trader with less capital may prefer to focus on stocks under $5 whereas a trader with a bigger account may prefer to focus on stocks over $50. Some traders may prefer to trade stocks within an industry that they are familiar with. The goal here is to narrow down your focus and become a master in one area. Not all stocks have the same trading patterns, so it’s important to focus on a specific niche so you increase your chances of success.
Short vs. Long
When day trading stocks, you can take two main approaches. You can “go long” on a stock, meaning you profit when the stock increases in prices, or you can “short sell” a stock, meaning you profit when the stock decreases in price.
A well-rounded trader will often play both sides of the market, however a new trader should narrow their focus. If you’re constantly looking for both short and long setups, you are diluting your efforts. Focus on one style when you start, and look for profitable setups within that niche. If you are better at predicting downside, shorting may be your best bet, whereas if you are better at predicting upside, going long may be a better fit.
Technical vs. Fundamental Trading
There are two main foundations for a trading strategy: technical analysis and fundamental analysis. Technical analysis is focused on using a stock’s historical price movement to predict its future price movement. This approach relies heavily on stock charts as well as some other technical indicators. Fundamental analysis focuses more on the information about the underlying company. A fundamental analyst may focus on how much cash a company has on hand, what the company’s revenues look like, and what upcoming catalysts the company has.
Both approaches will overlap with each other at certain times. For example, if a stock is up 100%, a technical trader may focus on the catalyst that caused the spike. Similarly, if a fundamental trader finds a stock with an upcoming catalyst, they may resort to a stock chart to look for an ideal entry price based on historical data.
Defining your approach is very important because it will dictate your research process. Once again, you should focus on your strengths. If you are good with numbers and reading charts, technical analysis may be a good fit for you. If you are good at understanding how a business operates and have some accounting knowledge, fundamental analysis may be a good fit. You should also focus on your timeframe and the types of stocks your playing to see whether technical or fundamental analysis will be a better fit.
The Importance of Defining Your Style
It’s important to define your trading style so that you only focus on relevant information. Your narrow focus will help you master your art much faster. Once you choose your trading style, you will know exactly what you are looking for and you can filter trade opportunities accordingly.