Different Trading Styles: Understand Your Market Environment

In any business situation, you will want to be fully conscious of your environment. Your “environment” encompasses so many things, however, one of the most important is people. Knowing about the people you are dealing with gives you a competitive edge in any business situation. The stock market is no different. This is a huge part of trading psychology that you should be aware of when considering entries and exits. I decided to write this article because I find myself facing this issue whenever I test out new strategies. It is easy to forget that not all traders think the same. Yeah, you probably knew that, but have you really incorporated that knowledge into your trading strategy?

Far too often I see people getting angry at other traders, critiquing trading styles, and failing to understand why stocks are behaving the way they are. “Why the hell is everyone selling when there is big news expected at the end of the month?!?!?!” Simple, because some traders don’t want to hold shares for a month. It is important to remember that all traders are trying to make money. Anyone who is making money consistently has a solid strategy. That being said, not all of these strategies are the same and people like to stick to what they know. Sure, day traders may be able to make a lot more money in certain cases if they hold a stock for longer, but that is not their style so don’t expect them to become an investor overnight. Don’t get angry about other people’s styles and opinions. Learn from them and take advantage of them. This is why it is so important to remain emotionless while trading. You can just sit back and analyze the situation free from any biases. Let’s take a deeper look at why it is so important to understand other people’s trading styles.

Why does it matter?

You probably already knew that everyone has a different trading style, but whyexactly is this so important? Why should you care about how someone else trades? The answer is simple. People’s trading strategies affect their entries and exits. Entries and exits are buy and sell orders that affect stock price movement. Therefore, different trading strategies are responsible for the price movement you see every day. It doesn’t matter if you agree with someone else’s trading strategy or believe in its feasibility. What matters is that the person using the strategy believes in it and that belief will be reflected in the stock’s price action. Understanding how different traders are playing a stock will give you an edge. Let me give some examples:

Charting Example – I am neither a strict chart trader nor a strict fundamental trader. I use a variety of strategies when I trade and don’t overvalue any of them. That being said, some people have a method that works and they stick to it. I always have to remind myself that some people use stock charts religiously. When a stock is approaching a known support level during a down trend, there will be a lot of chart traders looking to move in for a dip buy. Maybe it is a self-fulfilling prophecy, but that doesn’t matter. All that matters is that you know what these traders are doing and act accordingly. If you know a stock will have heavy buying at support, you may consider an entry for a bounce. The same applies to resistance levels and technical indicators. It doesn’t matter if you believe in chart trading. What matters is that other people do and this will affect the price. Sometimes, I can be slightly cynical and expect the worst when a stock is moving towards its support levels. Are people really going to buy at that price when the stock is tanking? The answer is “yes” and when enough people do it, a trend is formed.

Penny Stock “Investors” – I would never consider a purchase of shares in a penny stock company a real “investment.” There is too much volatility, shadiness, and other random factors that make the investment risky. That being said, there are a lot of people who actually invest in penny stock companies. When I find companies with a strong, almost “cult-like” following, I take advantage of this. These investors lock up the float and provide support during big drops because they see the new share prices as a great value. Does this mean I am going to invest in the company? No. It means that I understand how other traders are thinking when they place trades, and that helps me plan my entries and exits.

So, let’s get straight to the point and go over some different trading styles that you should be aware of.

Popular Trading Styles

I will go over a few popular trading styles below. Some of them overlap, but try to focus on the psychology behind each style. Think like a person utilizing the strategy would think.

Day trader/scalper. The numbers are not exact and each trader within the subcategories will be slightly different. Just use this chart to understand the bigger picture.

Style Timeframe Profit Goal Indicators Used Important Traits

Day Trader Minutes

Hours 5-10%+

Based on price action Chart Patterns (Intraday + Daily)

Volume

News

Industry/Sector performance

Price Action (Level 2) Responsible for a lot of volume

Don’t hold positions over night

Don’t usually care about company fundamentals

Don’t care about long term potential

Can push a stock price up and down fast.

Won’t lock up the float

Has a strategic plan

Out of a trade fast if it doesn’t go as planned

Utilize stock screeners Swing Trader Days

Weeks 10-30%+

Based on price action Chart Patterns (Daily)

News

Industry/Sector performance

Price Action (Level 2)

Upcoming catalysts

Company fundamentals Value company fundamentals sometimes

Use charts for price targets

Buy around support or broken resistance

Not real “longs” but similar traits

Will sell when price target is reached

Looking for higher gains than day traders Scalpers Minutes

Hours 1-5%

Based on safe, easy trades Chart patterns

Channels

Historical support/resistance

Price action (Level 2) Don’t care about fundamentals

Try to make a lot of small gains

Needs to trade high volume to make good profits

Place safe, easy trades to take advantage of predictable price movement

Utilize charts for planning entries and exits

Help sustain volume in a stock

Can make it harder for a stock to run Momentum Traders Minutes

Hours 5-10%+

Based on price action Chart patterns (Intraday)

Volume Look for volume and hype

Value charts over fundamentals

Take advantage of catalysts like news

In and out of a stock fast

Utilize stock screeners

Sub-category of day trading Chart Traders Minutes

Hours

Days

Weeks

Months

Years Varies by trader Chart Patterns (Intraday, daily, weekly)

Volume

Support/Resistance

Technical Indicators

Channels They add validity to chart patterns

They are predictable because you can look at historical data

Use a variety of complex technical indicators

Can help support breakouts on multiple time frame charts

Very methodical/strategic traders News Trader Minutes

Hours

Days 10%+

Based on growth prospect

Varies depending on news News

Financials

SEC Filings Contribute to momentum

Push the price up or down on news

Can be day traders or swing traders

Predictable because news is their trigger

Price targets vary by price action depending on how traders interpret news Short seller Minutes

Hours

Days Varies by trade Chart patterns (intraday + daily)

News

Company fundamentals They sell shares and want to push the price down

They are betting against a company’s success

Their are certain regulations they have to follow (important to know)

Usually very cynical of many companies

They can get “squeezed” and cause a stock to breakout Gambler/Dreamer Days

Weeks

Months 50-100%+

Based on hype

Trying to get rich quick None, sometimes

Hype

Message board banter

Social proof

News “Bagholders” lock up the float

Naive and not strategic

Usually has less capital

Buys into hype and regurgitates it

Does not understand risk management

Driven by greed

Lacks feasible price targets

Doesn’t have strong rationale behind a trade

Usually very active on message boards

Lock up the float Value Investors Weeks

Months

Years Varies based on fair value

Sell when fairly valued Company fundamentals

Accounting ratios + formulas

Sector analysis Focuses on what a company does and how well they do it

Looks for undervalued companies

Truly believes in company so holds shares longer

Has realistic price targets based on fundamentals

Doesn’t give too much weight to charts

Ignores intraday trading patterns

Can forget that a stock’s value is determined by the market

Can become a bagholder

Lock up the float Growth Investors Weeks

Months

Years Varies by company

Sell when company peaks Company fundamentals

Accounting ratios + formulas

Sector analysis Looks for growing companies

Similar to value investors but puts more weight on future performance

Often invests in booming sectors (eg. Marijuana)

Values a company’s fundamentals, specifically their growth rate

Doesn’t give too much weight to charts, but prefers upward trends to confirm fundamental research

Focuses on long term price action not intra-day moves

Does a lot of due diligence on a company

Lock up the float Hype Investors Weeks

Months 50%+

Buys into hype

Sells when hype is gone None, sometimes

Message board banter

Social Proof

News

Volume Invests based on hype (eg. marijuana)

A more refined version of “Gamblers/Dreamers”

Different from momentum traders

Uses social proof so easily influenced

Has minimal rationale behind trades/investments

Sees what they want to see

Usually doesn’t have a risk management plan

Usually very active on message boards

Lock up the float

What does this all mean?

Now, you have some data about some different kinds of traders and investors. This data is useless unless you find a way to incorporate it into your strategy. The best way to do this is to be conscious of other people’s trading styles and find a way to take advantage of them. For example, you may not be a “News Trader” but if you know there are people playing the news, you can get in on that trade and make a nice profit. You may be a “Value Investor” but your stock starts running up from momentum. You may want to take this time to sell some shares because you know some momentum traders will be selling soon. Knowing how other people trade can help make your strategy even more effective. This list only covers a few different types of traders and people can find themselves in more than one category. Think of some the other kinds of traders and put yourself in their shoes. Try to think like exactly like them so you can know their thought process and predict their future actions.

I started this article off with a reference to business and how important it is to understand the environment you compete in. If you run a business, you would want to know exactly what your competition is doing. You could replicate the positive things and avoid the negatives. Additionally, you could take advantage of your competition’s shortcomings. If you know your competitor is always closed on the weekends, you could run a marketing campaign telling people you stay open all week. The same logic applies to trading. Know other people’s trading styles, learn from their strengths, and take advantage of the insight you gain. If you know that everyone is going to run a stock up in a week on earnings, give yourself an edge and buy early. There are no definitive rules about how you should take advantage of other people’s trading styles. Get creative and start testing out strategies.