While “buying and holding” is the philosophy favoured by Warren Buffett and The Motley Fool, it would be foolish to suggest that’s the only way Australians are investing in ASX shares.
Your own personality, risk appetite, time constraints and self-belief will combine to lead to an investment style that you’re most comfortable with.
Are you patient or impatient? Do work and family commitments prevent you from pouring too much time into research? Do you need to fiddle and tinker with your portfolio, or can you let it be?
While there are many variations, a stockstotrade.com blog post managed to classify stock investors into 4 distinct styles.
It can be helpful to identify what type of investor you are and how other people may approach money-making differently to the way you do:
1. Position trading
This is the style that most closely resembles “buy and hold”.
You research the fundamentals of a business. If you decide that it has a bright future, you buy the shares.
Then you wait. Months or even years. You’re in it for the long haul.
“You’ll need a lot of patience and belief in your decisions,” stated the stockstotrade.com blog.
“No matter how many ups and downs the market experiences, you have to ride out the storms to reach your goals.”
While buy-and-hold may not demand much daily portfolio maintenance time, any ASX shares that you commit to must have serious research behind it.
“There’s no way around it. Would you put your money into a single company for years at a time not knowing much about it? I sure hope not!”
2. Swing trading
This involves holding ASX shares for a period of a few days, weeks or maybe months.
Swing traders aim to take advantage of momentum and sentiment for particular stocks. As well as researching fundamentals of the business, they will also follow technical indicators of the stock price too.
They might hold a stock from one ex-dividend date to just before the next one. They might hold it from one quarterly earnings to another.
According to the blog post, this strategy demands at least a couple of hours each day to analyse the market and to execute.
Swing traders end up making about 25 to “a few hundred” trades each year.
3. Day trading
The term ‘day trading’ can evoke many different connotations to people.
But essentially it is defined as an investor who will sell out of all their positions within the same day.
If they hold anything overnight, that becomes a swing trade.
Day traders aim to profit from very short-term movements in the share price.
According to stockstotrade.com, while day traders must be glued to their computer screens all day, they’re not necessarily buying and selling the entire time.
“Most traders take positions at two key times — at the market open and close. That can mean more time for other things mid-day,” the blog reads.
“But you must do your homework the night before and in pre-market. Prepare for the action.”
Day traders understandably make hundreds to thousands of transactions each year.
4. Scalp trading
This is the fastest-paced strategy available to a retail investor. Shares are only held for a few seconds or minutes.
“Scalp trading demands high focus, concentration, and attention to detail,” stated the blog.
“So you need to be OK with spending long hours in front of your screens.”
These investors are looking for minute-to-minute movements up and down, based on technical analysis of the stock price movements. Very rarely are company fundamentals involved in these fast decisions.
You also need a decent lump of capital to get started.
“You learn the results of your trade fast and move on fast,” the blog reads.
“You don’t want to take negative emotions from a losing trade into your next trade. You have to accept your last trade and move on to the next.”
Funnily enough, this rapid action method still demands patience from the investor.
“You need to stay glued to your screen throughout the trading day. Then when you find the best setups, it’s time to act fast!”
The post Which one are you? The 4 different styles of trading ASX shares appeared first on The Motley Fool Australia.
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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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