For every trader, there are certain preferences and methods that follow the trader’s personality. In terms of trading, these come in the forms of:
To understand your trading style, it’s important to engage in some introspection. Successful traders can’t have completely identical processes. There are no complete, uniform styles that traders take.
The idea that you can simply copy another trader’s process is only partially true at best. But your own personality, limitations, and beliefs will lead you to differentiate your process from others’.
In this article, we will go over the questions that help you find your trading style. That way, you can continue to develop your trading style in a way that helps improve your understanding and success.
The choice of stocks you focus on will play a large role in figuring out what your trading style is. Stocks can be differentiated in a few ways. First, there are simple behaviors:
Then, there are other areas different traders focus on, such as a specific industry to focus on.
Some traders will gravitate towards low-priced stocks with high growth potential (growth investors). Others will weigh financial stability more heavily, while others will strictly stick with an industry they understand thoroughly, while weighing stock prices less heavily.
This is the second most crucial question if you’re trying to determine your trading style. Holding for a long time vs short-term strategies like day trading reveals a lot about your mentality and risk tolerance.
Traders (investors) who maintain a position long-term are normally avoiding risk and aiming for a less hands-on approach. Taking advantage of price movements over a longer period is easier, but it also speaks to a different mindset regarding trading.
The key differences are in the trading types’ visions of what constitutes an opportunity. For a scalp trader, the tiniest price movements represent a new opportunity. But to a longer-term investor, those same price movements are not viewed as an opportunity at all.
Traders with some experience will normally develop a set of rules to refer to for entering and exiting trades.
The habits you have when it comes to entering trades are an important area to focus on. If you haven’t already, you should make note of what those habits are, then try to turn them into a practical set of rules. They will become a key component of your trading strategy.
Most traders have either a habit or a rule of entering trades according to their place in a trendline. Following trends can be sensible if your trading strategy is sound and reliable. Others are more contrarian, and in looking where others are not, they find their opportunities.
Your own practices will involve you going through the stocks that exist within your trading framework. Beyond that, the key is understanding how to execute efficiently, which means different things for different traders.
How do you maximize the profits on your trades?
The methods you take to maximize your upside and minimize your downside also reveal a lot about your trading style.
If you’ve been trading for some time, you’ve probably already developed habits, if not rules. However, your strategy should include:
For example, some traders prefer to enter positions cautiously, buying more only when they’re already profitable. Others enter a position definitively, buying more and not adding any more.
As a follow-up to when you enter a trade, your exit strategy is the next defining feature of your trading style.
While this is the last question to help you understand your trading style, it’s not the least important. It is, however, an area that many beginners overlook.
Experienced traders set key triggers for exiting a trade. Often, this means exiting when a specified profit target is met. For a scalp trader, it’s even simpler; you exit when the first opportunity for profit arises. Other strategies employ a mix of these factors and others.
There are many factors that go into determining what your trading strategy is. While there are other interesting areas to explore, they are too specific for the scope of this article.
The questions we’ve covered are the most significant, of course meaning that they have a significant effect on your bottom line.
Understanding what constitutes a trading style helps you improve your trading practices. By paying attention to and codifying these parts of your trading process, you can more easily define what kind of trading style you use.
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