What Kind Of Trader Are You?

One of the key things most traders only learn after many hours of honing their craft is what they are trying to accomplish. I don’t mean why they are trading — the reason behind that should be to generate profit to continue investing or save for their future. What I mean is, traders tend to benefit from knowing what they, specifically, are trying to accomplish in their personal trading habits and whether their trading strategies are, or are not, accomplishing that goal.

Much of this comes down to identifying which approaches to trading they implement. From there, traders can make decisions in their trading to better fit those approaches and, in the end, increase their rate and margin for success.

Below, I’ve put together brief definitions of a few of the most common styles of trading as well as some of the tools each incorporates to amplify its approach.

Momentum Trading

Momentum traders thrive on the continued momentum of price in a given stock. This means they buy on indications of a rise in price and sell when that trend begins to reverse.

Momentum traders can often rely on technical indicators to determine whether an upward move is likely to be sustained. Some of these signals include trend lines, the long-term performance of a stock, or support and resistance levels, recent recurring highs and lows in a stock’s price.

A key tool for these kind of traders are stop-loss orders. By placing sell orders at a particular price, momentum traders can protect against outsized downside to their trades.

Scalp Trading

Unlike momentum traders, scalp traders aren’t relying on sustained performance of their stocks to find profits. Instead, they look for short-term trading opportunities, usually a matter of minutes, to make a series of small profits over the course of the day.

Scalping can be a very effective form of trading for those with the experience and discipline to practice it. Scalpers have more opportunity to find profits because the price movements they’re looking for are common, generally only a few cents. This means they get in and out of positions frequently and at high speed, limiting their risk for loss, but also narrowing their opportunity for gains.

This frequent activity also means that traders need real-time, minute-by-minute market data and the confidence to execute a trade at their predetermined entry and exit points. This requires planning and a strong tolerance for pressure. 

Breakout and Pullback Trading

You might be starting to notice the nomenclature is on-the-nose for most of these strategies. Breakout trading, like it sounds, looks for stocks that appear to be breaking out of established patterns or trends, while pullback traders like to find positions in breakout stocks that look apt to return to a previous trend.

Like momentum traders, these types of traders zero in on the technical price patterns and support and resistance levels of the stocks they trade. A deviation from these patterns, or any indication of such, is when they tend to focus their attention: things like multiple dips to a certain support level that might signify a breakout or multiple highs that could portend a reversal.

These traders might also anticipate trends through fundamental data, like financial information or potential company news. However, breakout and pullback traders will generally place a larger emphasis on this type of information through the lens of technical factors.

Headline Trading

Traders who do rely on breaking company, industry or sector news and pounce on stocks that are reacting to it are headline traders. In terms of day trading, headline traders are looking for reactive stocks. For example, companies in the pharmaceutical industry are favorites of headline traders due to their potential for large, rapid gains on positive news on a drug trial.

However, experienced headline traders are also keenly aware of balancing volatility with volume. While reactive stocks hold a lot of potential, if their trading volume is too thin, meaning the amount of available shares are low, traders might end up losing money between the rush in demand to own shares and a subsequent sell-off from those looking to quickly collect profit.

These strategies, broadly defined, aren’t hard-and-fast categories. Most traders use a combination of these tactics to develop their own approach to the market and discover which technical indicators or fundamental data help them achieve their goals.

Disclosure: Warrior Trading is an editorial partner of Benzinga