Let's start this conversation off by stating that you can make money with any style of trading. In the day trading game, the primary factor that will determine your success or failure is what's between your ears. That said, there are many different styles that can be used in day trading.
It's important to define your trading style as early as possible in your day-trading career, because it will have a direct bearing on a number of important elements. For instance, your trading style will dictate the type of brokerage account you'll need, the type of trading software you'll use, the sort of training you'll need and the kind of mentor you may seek. Each style is a variation on the day-trading game with its own rules and idiosyncrasies – and you can't learn the rules until you know which game you'll be playing. Nor will you be able to develop a trading plan until you know your trading style, because to write a trading plan you must know what, when, why, where, and how much you're going to trade. And knowing these things actually goes a long way toward defining your trading style.
A trading style is defined partly by how much time is spent in the market – do you close all positions by the end of the day, or do you hold them overnight or perhaps longer? It's also defined by what you trade, whether you use technical analysis or if you base your trades on news events. Many elements go into defining a style but, again, the most important is the organ inside your head.
Your mental makeup will (or should) drive your decision about style. For example, if you, by nature, methodically think through a situation before making a decision, you may never make it as a 'scalper' because such a style requires the ability to make split-second judgments based on rapidly changing data. Or, if you've spent years making investments based primarily on fundamental analysis, you may have a hard time relying on signals emanating from technical indicators. You may feel more comfortable in trading a group of fundamentally sound stocks. The point here is to learn the essentials that make up the different styles, while at the same time learning about yourself. As you do, you'll naturally gravitate toward a style that best fits your personality.
Although combinations are virtually infinite, let's separately examine a few of the most basic trading styles that you might consider using.
When people think of the classic day trader, they typically imagine him or her employing this type of trading style. The scalper enters and exits a market position quickly, staying in long just enough to 'scalp' a teenie (i.e., a sixteenth, or 0.0625, of a point) in profit and getting out at the first sign of reversal. The trader using this style may make dozens or even hundreds of trades a day, sometimes on just one stock. Scalpers sit in front of their computer screens, grinding out trades (which is why they're also known as "grinders"), some trading any security that moves, others concentrating on a group of related stocks.
As you can guess, one-sixteenth of a point isn't much. One point is equal to one dollar, so a sixteenth of a point is $0.0625. So, a scalper trading for teenies (or a 'cents,' as teenies are often called now that securities trade in decimals) expects to make slightly over six cents per share on a successful trade. On a 1,000-share trade, that's $62.50; on a 2,000-share trade, it's $125; and on 5,000 shares, the profit is $312.50. Commissions can dig deeply into those earnings, especially on smaller trades. And, of course not all trades will be winners. To make money here, traders must make larger-than-average trades (at least 1,000 or more shares) and try to let their profits run.
Scalpers are also called "trend-" or "momentum traders" because they typically look for intraday trends or momentum. They'll buy a stock on a dip, sell it on a crest, short-sell when it turns downward, and cover when it heads back up. As such, this style requires volatile stocks, a good technical strategy to time entry and exit points, and complete emotional detachment.
Scalping ideally requires a large amount of capital (some say $100,000 minimum), a full-time commitment, a professional-level trading platform with a high-speed connection, a thorough knowledge of the markets, and nerves of steel. According to some experienced in the field, this style tends to be more suited for younger traders, the rationale being that for scalping you need lightning-quick reflexes and an appetite for risk-taking. And let's face it, not only do our reflexes slow a bit as we grow older, but most of us also become more conservative in our thinking and less willing to act boldly with our money. Of course, there are scalpers of all ages, but the likelihood is that the older ones have been doing it for quite a while already.
Swing traders operate in a longer market time frame than scalpers do. Instead of looking for teenies over the next several minutes, these traders look moves of several points over the span of one- to five days. This trading style usually focuses on technical information, so at least a working knowledge of technical analysis is necessary. You don't have to be a full-blown technician, you simply need to be able to identify short-term uptrends and downtrends and other technical basics. But swing traders may also trade on breaking news events such as earnings releases, stock splits, and up- or downgrades that could present opportunities for short-term profits.
Swing trading typically appeals to the more conservative individual who wants short-term profits but doesn't quite have the nerves (or, perhaps, the bank account) to operate as a scalper. It can be done on a part-time basis because you don't have to monitor your stock every second that your position is open. And you can get by with a smaller amount of capital (and also smaller trades) because you're looking for multiple-point profits instead of teenies. However, the overall risk is greater because you're holding market positions overnight, and sometimes over the weekend.
The principal difference between a position trader and a swing trader is the length of time a market position is held – though the terms are often used interchangeably. Position traders typically buy and hold a stock for up to ten days. Some might argue that a person holding onto a stock for ten days technically cannot be called a day trader, but it must be conceded that he or she is nevertheless a very active trader, distinguishing them from an actual investor. In fact, many traders prefer the term "active trader" to the somewhat stigmatized and more uncomplimentary term of day trader.
Position trading offers the same advantages and similar market risk as swing trading. Traders utilizing this style might be technicians that buy a stock and wait for a technical pattern to develop, or they could be fundamentalists that keep a position open just long enough to get the market impact of a news-driven event. If you're reluctant to start at the 'deep end,' this type of day trading might be a great way to get your feet wet.
Most day traders use technical signals to determine entry and exit points; some additionally use technical analysis as a tool to find stocks that are good candidates for trading. Still others, however, are pure technicians, virtually ignoring quotes and market-maker influences and basing all of their trade activity on price trends or technical signals. These traders may be technical scalpers, technical swing traders or even technical position traders. The point to note is that a technician's entire strategy is grounded in technical analysis, with everything else being secondary to it.
The best technicians are not only comfortable with numbers but also understand the theory behind an indicator. Nevertheless, any trader will be in a better position by knowing at least the basics of technical analysis, such as support and resistance, simple trend-lines, and moving averages.
Some traders have no style of their own; they simply follow someone else's lead. These are the traders who populate the online trading pits – the chat rooms where a head trader calls the plays and the followers try to duplicate them. They buy when the head trader says to buy, and sell when the head trader says sell.
Some do very well, but there are dangers in being a follower. For instance, if you blindly follow the lead trader without learning the methodology behind the activity, the leader will become a crutch that you won't be able to function without. Furthermore, by simply following a leader, you'll never be pressed to take responsibility for your trades, because you can easily blame any losing transactions on the leader. And, if you never take responsibility for your trades, you'll never develop the 'trader mindset' that's so essential to successful trading. Be aware, also, that as a follower you'll by definition always be at least a step behind, which can be critical in trades that depend on split-second timing. Caveats aside, however, following an experienced lead trader can be a good way to learn how to trade, as long as he or she coaches and teaches as they go.