Different Types of Trading

In this article, different types of trading are introduced and reviewed based on trading transactions, time frames, analysis techniques, and asset class.



1. Based on transactions

Momentum trading

Momentum trading is a technique where traders buy and sell based on the strength of recent price trends. Here traders look for stocks that move a high percentage and volume over a specific period and move significantly in one direction and try to make the desired profit by taking positions in such stocks.

Momentum trading seeks to profit by buying stocks that are moving in an uptrend and selling stocks in a downtrend.


Trading based on mean return

The opposite of momentum trading is trading based on mean return. In this trade stocks that deviate from their historical average price will return to their average value over some time.

Traders can take long or short positions to take advantage of the stock’s mean returning behavior. Unlike momentum-following strategies that work on the principle of buying high and selling higher (in an uptrend) and selling low and buying low (in a downtrend), mean return strategies seek to invest in the classic principle of buy low and sell high.



2. Based on the period


A trade where the trader takes advantage of the bid-ask spread by jumping in and out of stocks or other asset classes several times a day to make a small profit on each trade.


Daily deals

In daily trading, if an investor buys and sells stocks on the same day, it is called intraday trading. This directly means that if an investor buys a set of stocks in one day, he must sell those stocks by the end of that day, before the market closes. This form of trading allows investors to use margin, where they benefit from the credit of a broker.


Swing trading

Swing trading invests in changes or fluctuations in the price of stocks or any other financial commodity in the market over several days. Traders participating in swing trading intend to hold the stock for more than one day and benefit from the added momentum in the stock price.

The main factor that differentiates swing trading from others is the time frame. In swing trading, the stock is held by the trader for a short period – a few weeks at most.

In this type of trading, traders need to be able to understand the price trends in the market. They need to understand the trend to generate high profits.


Positional trading

Unlike swing trading, trade lengths are much larger for positional trading. Positional trading includes trades that last from several weeks to several months and sometimes several years. Positional trading is as close to long-term investing as trading.

In general, the probability of success increases from day trading to position trading. Since the long-term market structure is bullish for most markets, position trading has a very good chance of success.



3. Based on the analysis

Technical trading

Technical trading is done through efficient technical market analysis. This type of analysis helps traders understand stock price movements and make trading decisions based on that.

A technical trader can be successful through his ability to conduct research and knowledge about stocks. This form of trading requires the trader to be able to read charts and graphs containing information. In addition, the risk of this type of trading is relatively high and tracking patterns is very important.

Therefore, it can be said that a stock trader can indulge in any of the above-mentioned forms of trading that influence his buying and selling decisions and, most importantly, the reasons that drive these decisions.


Fundamental trading

Based on fundamental analysis, this type of trading examines things like corporate events (actual or projected earnings reports, stock splits, reorganizations) or acquisitions. Fundamental analysis is best suited for long-term trading that avoids short-term price fluctuations or noise.



4. Based on asset class

Stock trading

Stock trading is the buying and selling of stocks or company shares, also known as shares, in the financial market. Most stock trading refers to the buying and selling of shares of public companies through the stock exchange or as over-the-counter products.


Derivative trading

As the name suggests, derivatives are contracts that derive their value from an underlying asset. The underlying asset can be a stock, currency, index, etc. Derivative transactions include buying and selling derivatives in the stock market.

One of the interesting features of derivatives trading is that it allows the trader to make much larger speculative bets and is therefore much riskier than stock trading. The two most common types of derivatives are futures and options.


Currency trading

Currency trading or Forex trading refers to the process of buying and selling currency pairs. Currencies are usually traded in pairs, for example, EUR/USD is the most liquid currency pair that provides the relative value of the Euro to the US Dollar at any given period.

A huge advantage of currency trading is that the Forex markets are always open. The respective liquidity and spread offered may vary from time to time.


Commodity trade

Like stocks and currencies, commodities are tradable assets. Commodities traded are usually divided into four broad categories: metals, energy, agriculture, livestock, and meat.


Crypto trading

Crypto trading refers to the process of speculating on future price movements of cryptocurrencies in an attempt to make a profit. Compared to the other asset classes described above, crypto trading is a relatively newer concept.

There are two ways to trade cryptocurrencies: speculating on their price using CFDs or buying cryptocurrencies in the hope that they will increase in value.


The bottom line

Active traders can employ one or many of the above strategies. However, before deciding whether to engage in these strategies, the risks and costs associated with each should be considered.



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