Trading styles in the equities market

It’s generally preferable for stock market traders to trade the style that’s most comfortable, rather than one which earns others a substantial profit but which might not suit one’s own abilities or inclinations. The best and most fool-proof of systems will only be so for those traders who find it suitable, and it will perform less robustly when filtered through a person who finds it too long-term or too much work.

Scalpers, for example, work very hard. They’re in and out of the stock market with several to hundreds of small trades per day, and must research each of them. The duration of these trades may be mere seconds or a few minutes, but rarely more than half an hour. Scalpers earn a small amount on each quick trade, often utilising high leverage and risk and trading volatility rather than market moves, and the large number of trades can transform these small gains into substantial profits.

Most quant traders are scalpers, their trades computer-controlled using mathematical models that depend less upon company fundamentals or technical analysis and more upon probabilities. Most such computer programs are jealously guarded, and may carry a significant purchase price. This is extremely high risk trading, with enormous profit potential and equally enormous loss potential. The U.S. stock market crash in October 2008 was caused by conflicting quant trading models.

Day traders enter and exit the market less frequently than scalpers or quant traders, but still rather often by general trading standards. By catching small moves occurring over a few minutes to a few hours, day traders also use repetition to build their profits, generally earning relatively more per trade than scalpers due to this longer time frame. Most day traders do not carry positions overnight.

Swing traders work the middle range, holding positions from a few days to a few months. Utilising hourly and daily charts, they follow each move within the overall trend, exiting at retractions (and perhaps short-selling them), and then re-entering the market for the renewed trend. Swing traders tend to earn larger profits per trade, generating their returns less from volume and more through expertise.

Position traders are the longest term traders of all, holding positions for months and sometimes years. Unconcerned by retractions, they’re less concerned with calling trend tops or bottoms than with catching a significant portion of the move.

A look at the chart of BHP Billiton (BHP), below, shows it suited to all of these trading styles. The bullish trend remains strong enough for position followers, and there are plenty of retractions for swing traders and sufficient volatility for the short-term crowd:

Since the previous analysis, BHP has filled in most of its remaining gaps, although one appears to remain between 41.29 and 41.91. The bullish trendline survived the recent testing, however, the current bearish momentum may see it test the trendline yet again before it returns to fill this latest gap.

technical analysis by Craig Liles