Trading Styles.....Part 1

Style: "Trading" vs. "Investing" or "Buy-and-hold"

Traders enter a position - whether long or short - in anticipation of exiting in the very near-term. That holding period can be defined as minutes ("scalping"), hours ("trading"), or days ("swing trading"). Even if the trade is timed to coincide with the release of an economic report, fundamental data or another public event, the trader intends to exploit an inefficiency in pricing, or a sudden shift in opinion among the majority of other active market participants.

Investors enter a position with the intent of holding it for a time period that can be defined by units longer than days - weeks, often months, sometimes years. Style descriptions can range from making a single entry when a signal is triggered, or building a position with multiple entries within a price zone, to "scaling" in or out of a position as trending develops. These tactics can be applied both to trading and to investing. The following discussion applies these tactics to Conservative and Aggressive trading styles.

Conservative vs. Aggressive

Trading requires active attention and constant involvement, so it isn't as conservative as investing. But a trader can still act conservatively by limiting his entries only to the choicest opportunities. The Conservative trader would also expect to maintain or increase his position through one or more consolidations, reducing risk by adjusting stops as the desired trend develops. The Aggressive trader manages risk by minimizing his exposure to a position - more so in terms of holding period than of position size. Some traders adapt their style to either Conservative or Aggressive depending upon their comfort level or reading of current market conditions.

Underlying Bias

The bias-up or bias-down signal predicts that price action is likely either to trend in a certain direction (up or down), or else retrace a counter-trend move (pullback or bounce, respectively) and extend further. The no-bias signal predicts that trending attempts are unlikely, and that any trending attempt would likely retrace back to its origin. A Conservative trader would wait for the signal to be triggered at the appropriate time. A less Conservative would consider acting if the signal's trigger price were crossed before the appropriate time. An Aggressive trader might act in anticipation and expectation of the signal being triggered. Each tactic carries its own risk. Therefore, there are strategies for managing each tactic.

Conservative strategies

The Conservative trader waits for the bias signal's two elements to trigger. In the case of a Bias-up signal, this would require S&Ps to be above the specified level, at the specified time (or in the case of a Bias-down signal, S&Ps would need to be below the specified signal). The Conservative trader chooses this tactic because the Bias-up signal is also "resistance," and instead of its test extending higher, the signal level may hold as resistance and send price back down before the appropriate time.

In the example below, the Bias-up signal is tested immediately, and S&Ps range around it long enough to trigger it.

Of course, the S&Ps price may rise above the signal level before the appropriate time. The Conservative trader would still wait for the appropriate time when the signal is officially triggered before establishing a long position (i.e. buy). Ideally, a "pullback" to the signal level after it officially triggered would provide an opportunity to buy before too much of the expected move had already developed.

Once a long (or short) position has been established the stop or target should be adjusted. Generally, the bias-up signal itself would serve as the stop, if not the actual low of any consolidation around the bias-up signal. Upon reaching the Bias-up (or Bias-down) signal's target, the Conservative trader may choose to exit his long position and wait for the next period's signal to decide whether to re-enter long or short. The Conservative trader might choose instead to hold the position in anticipation of the trend extending. This latter option is not conservative if the next signal is not until the following morning or on a Friday, when it would involve holding the position overnight, into Friday afternoon, or over the weekend. (On holiday-shortened weeks, "Friday" would refer to the week's last trading session.)

In the example above, the bias-up signal's target is met and causes the rally to consolidate. A decision needs to be made whether to hold long, or else reduce exposure.