How to Trade Stocks - Types of Trading

Now that you know who the major participants are, you see what you are up against. These guys mean business. They can move the markets, and they can eat you alive if you don't know what you are doing or take things lightly. That does not mean you can't beat them - you just need to know how.

Long vs. Short

You can bet on stocks going up or down. Up is simple: you buy, or go long.

Short Selling

Stocks fall much faster than they rise, so some traders bet on the downside.

In short selling, you borrow a certain number of shares you don't own from your broker and sell them immediately in the expectation that you can buy them back cheaper later. All the broker cares about is that you return the same number of shares you borrowed, not the price you pay for them. Your profit (or loss) is the difference between what you get for selling the borrowed shares upfront and what you spend to buy them back later. When you buy the shares back, you cover your short position.

Time Frame

Different traders operate in different time frames.

Daytraders trade intraday, typically closing out their positions at the end of each day. Daytrading can be lucrative (it certainly is fast money); and since they don't carry positions overnight, some daytraders say it involves less risk. But it is also intense, requiring you to risk large sums of money fast for small gains in a few large positions.

Scalpers trade for small short-term gains wherever they can get them.

Swing Traders trade short-term trends typically lasting from several days to several weeks.

Position Traders trade intermediate trends that can last from several weeks to several months.

All can go long or short.

It is generally not a good idea to start with daytrading or scalping. The skills required to react to short-term swings take time to develop. You can't learn them from a book or a website; you can only "graduate" through experience.

As you can see, one category that's missing here are long-term investors. If you invest in stocks through mutual funds, one thing to keep in mind is that many funds have high turnover rates, sometimes over 100% annually, meaning that they turn their entire portfolios over at least once a year. So while encouraging you to invest long term (in them), they themselves are nervous Nellies dashing in and out of the market at the slightest turn.

Buy-and-hold is a dying trend. Stocks live and die by the products they sell. As product lifecycles (and public attention spans) become shorter, so do stocks' life spans. You can still buy and hold - but for as long as a stock is making you money: a week, a month, a year. Call it a modified buy-and-hold. But in essence it is swing or position trading.