There are four main types of trading strategies that investors and traders deploy when trying to make a return on their money. These strategies vary a great deal in terms of what investors are looking for and how long the positions are held. The four main strategies are Scalping, Day Trading, Swing Trading, and Position Trading.
Scalpers usually trade on a ultra short timeframe. Generally when scalping, people will only hold a position for a few seconds to a few minutes at the most. The general idea of scalping is that you are taking advantage in some ultra short price move or discrepancy between the bid/ask spread.
In order to make money scalping, traders need to enter and exit hundreds or even thousands of trades a day. Trading so frequently makes not only the transaction speed critically important, but it also makes the transaction costs important. Any slight discrepancy between the speed and cost and the trade can turn from a profit to a loss. This is one reason why scalpers like to be located as close to the exchanges as possible.
Scalpers also prefer to trade highly liquid markets that have a very narrow bid/ask spread and tend to trade the most liquid times of the day as well.
Day trading is another short term trading strategy where positions are held for less than one day. Generally, day traders are trying to take advantage of short term technical trends in markets. With these short term trends comes risk that is not able to be managed when the markets are closed, which is why most day traders leave the day “flat,” or with no positions.
Day traders usually pay very close attention to momentum indicators such as the Moving Average Convergence Divergence (MACD) indicator, the Stochastic Oscillator, and the Relative Strength Index (RSI). These indicators, when used appropriately, can give a short term trader an indication of when the price is going to change direction or when it will continue in the same direction.
Unlike scalpers and day traders, swing traders will hold their positions for longer than one day. Swing traders try to take advantage of momentum trends that occur in markets over the span of a few days to a few weeks. Swing trading also takes much less time than scalping and day trading, so it is more popular with investors who want to be active market participants, but also have full time jobs.
Like day traders, swing traders use a number of technical indicators when trying to determine positions that might make good investments.
Position traders hold their positions for the longest amount of time. Usually, position traders will hold their positions for a few months to a year or more. With this, position trading also requires the least amount of active management, which makes it great for investors who have full time jobs, young children, etc.
Position traders usually look at both the technicals and the fundamentals when trying to find positions. Most position traders will use technical indicators as a way to spot entries and exits, but will rely on the fundamentals to drive the overall strategy.
In the past I have tried scalping, day trading, swing trading, and position trading (albeit I spent the least amount of time trying to scalp). What I will say is that unless you have some serious technical advantages, you should stick to either swing trading or position trading. Scalping is best left to the hedge funds and other participants that have the ability to trade ultra fast and day trading is best left to those that have countless hours to study charts.
For the average investor, it is possible to make money consistently swing trading. You just need to find a few technical indicators that work for you (I prefer a slightly modified RSI used in conjunction with Bollinger Bands and some sort of stochastic or MACD) and trust that your analysis is correct. In 2020 backtesting is easy, so you should be able to build some relative confidence in your strategy (make sure you don’t overfit the data though).
Additionally, EVERYONE should be a position trader in some form. Whether it is your 401k, your Roth IRA, or whatever; you should have some money invested in the markets for the longer term. This is how average people make money over the long term. Understanding that the above is describing somewhat more of a active position where you pick stocks that you think will outperform based on their fundamentals and then invest with the goal to beat the market, but the same principles can be applied to a retirement or ETF.