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Yesterday you chose your primary asset class to be trained in, stocks, options, futures, or Forex. During that training you’ll likely be learning a rule-based trading strategy.
The best way to get started trading is to have specific rules to follow. Entries and exits. Position size. Risk management. All these rules combined are your strategy. Eventually you’ll have more than one strategy but to start it’s better to focus on one.
Strategies can be lumped into two basic styles. Trend Following and Mean Reversion (reversal). There are many variations of these styles and even more styles, but these are the most common.
The purpose here is not to describe in detail all the strategies, it’s to give you a high-level view of what trading them is like so you can select the style that resonates with your personality.
Trend Following is popular and highly effective. As the name implies, you’ll be looking to enter a trend and remain in the trade until it ends. There are some issues that may not resonate with your personality though. First, prices don’t trend most of the time, they move in ranges more often. This means you’ll likely have around 30% of your trades win and 70% lose. The winners should be large enough to cover the losers and earn you a profit. Because the losing streaks can last a while, it’s best to trade multiple assets so that your combined results are tolerable. If that frequency of losing doesn’t bother you then Trend Following is a solid choice.
Mean Reversion, or reversal trading, attempts to locate turning points where the price move is exhausted and will likely return to the mean (average) of its history. This too is popular and highly effective. Since price bounces back and forth in ranges more often than trending, you’ll likely see a higher win percentage. However, you’ll need that because your wins will not be as large as trend wins. If you feel better to win more often even though they’re smaller then reversal trading is a good choice.
Breakout, or momentum trading is like Trend Following in that you’re expecting price to trend for a while but differs in its exit. While Trend Following waits for the end of the trend and therefore giving back substantial open profit, momentum traders will use chart patterns and technical indicators to exit when the momentum gets weak. If you like to follow and analyze your open trades this is a good choice.
For a thorough understanding of more styles of trading you’re encouraged to read any of Jack Schwager’s Market Wizards series of books. He interviews top traders and discusses with them how they trade. You’re certain to find a style that resonates with you.
Next is risk management. Job #1 if you’re going to survive and thrive in trading.
Our trading teams focus on multiple strategies for day trading futures and high-probability candidates for swing trading options. You can learn either or both risk-free. Join us.
To your trading success,
Mike Siewruk
PS: Feel free to forward this invitation to your trading buddies. Share in the wealth!
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