. . . . .Clarity on Trading Types. . . . .
To all:
MOST of the letters I receive, with confusion as to what is being said, or how to interpret certain moves, stem from misunderstandings of the many trading styles. To those confused over whether certain traders are in or out. . . allow me to point out some differences.
We are at a critical crossroads. Among the junction points include Long-Term Investor entry-points, based on lows in stocks and sectors which haven't been seen since April of 2000 or in the case of some October of 1998 or 1999. So there are long-termers gathering up the bargains.
Meanwhile, Position Traders are also looking for entry points. . . doing much the same as long-termers. . . as these lows are triggering technical indicators which compel them to take positions.
Then there are swing traders looking for an important market or sector correction . . .and wanting to swing ride that correction. They are more likely to jump in or out with both feet dependent more on volume, momentum and news. . . with an eye on TA. Risks are relatively low, compared to other trading types, since entry is limited to times when clear bottoms are put in. . . .yet rewards can be high, since often moves can be sharp.
At the same time that the markets are looking to change long-term direction, they are changing short-term direction, too. . .which is why volume can be sudden and sharp on turns.
There are Momentum Traders [often confused with Daytraders], who look for momentum in certain stocks or sectors and ride the momentum with large amounts of money. . .hoping for anywhere between an eighth of 1 point and 3 points. . . .these traders do not care which way the markets move, so long as they move. . . .scalping long or short with little regard to the value of the company. These are the gamblers of the trading community.
Finally, there are Daytraders who play anomalies or turns on just one or two stocks. These traders study a single stock day in and day out. . . watching every signal for a turn. . .carefully noting each characteristic of trading. . .then when they are completely confident with their "read" of the trading patterns [usually after months of tracking and notebooks full of notes], they begin to stick large amounts of money in on turns. . .going long on the turns to the north and short on turns to the south. . . back and forth on the same stock. . . day-after-day. . . like a job. This can be lucrative, but requires ENORMOUS discipline, time and commitment. . . consequently very few people are well-suited toward this type of tedious trading.
Now on the Thread Header there is an explanation of Hybrid Trading, which combines the best of all of the above, while minimizing risk in all of the trading styles. This is what many of us here are. . . which can get really confusing for newbies. . . since a trader could be posting he has entered WCOM for a long-term core, then an hour later post the same trader is taking a position in WCOM . . .and an hour later say they are playing WCOM on the swing. . . and even take a Momentum position WCOM. . . .so that when they say "selling WCOM" . . the question that should always be asked is "which position ["position term" is clearer] are you selling? Core? Position? Swing? or Day?" This question will help resolve most of the confusion.
Now when the whole market is at a crossroads, you can see how many potential positions can be considered by the many traders.
So again, the crossroads we are at in the markets are triggering signals by Long-Term Investors, Position Traders and Swing Traders. Throw in certain daily market swings and the Momentum Traders and Daytraders are looking to move at the same time as the others. This explains why sudden turns in the market are so often met with such extreme volume.
Considering that large Mutual Fund and Hedge Fund managers can fit into any of the above categories, it is easy to see why market or sector directional moves can be explosive. This also helps us to understand why volatility gets so high. If everyone were a long-term investor, there would be very little volatility. Look at the volatility levels in the 70's. There was none.
Stocks barely move during bear markets, which is why a bear market is the worse thing that could happen to any trader. Some short-sellers think it would favor them. But that is naive, since nobody makes money when the markets are not moving.
I don't see a bear in our future, however. And if anything, I believe volatility will get even WORSE! And don't blame that on the "daytraders", as CNBC and other media most often do. The hedge and fund managers jump on the bandwagons more than anyone in the markets.
Note: If Fund Managers or Hedge Fund Managers follow the herd and the herd is wrong, they still keep their highly paid jobs. However, if they stand alone against the herd and they are wrong, they lose their job. So following the herd is their only correct move.
Hope that helps some our newbies here,
Rande Is |
