Different Trading Styles: Understand Your Market Environment

In any business situation, you will want to be fully conscious of your environment. Your “environment” encompasses so many things, however, one of the most important is people. Knowing about the people you are dealing with gives you a competitive edge in any business situation. The stock market is no different. This is a huge part of trading psychology that you should be aware of when considering entries and exits. I decided to write this article because I find myself facing this issue whenever I test out new strategies. It is easy to forget that not all traders think the same. Yeah, you probably knew that, but have you really incorporated that knowledge into your trading strategy?

Far too often I see people getting angry at other traders, critiquing trading styles, and failing to understand why stocks are behaving the way they are. “Why the hell is everyone selling when there is big news expected at the end of the month?!?!?!” Simple, because some traders don’t want to hold shares for a month. It is important to remember that all traders are trying to make money. Anyone who is making money consistently has a solid strategy. That being said, not all of these strategies are the same and people like to stick to what they know. Sure, day traders may be able to make a lot more money in certain cases if they hold a stock for longer, but that is not their style so don’t expect them to become an investor overnight. Don’t get angry about other people’s styles and opinions. Learn from them and take advantage of them. This is why it is so important to remain emotionless while trading. You can just sit back and analyze the situation free from any biases. Let’s take a deeper look at why it is so important to understand other people’s trading styles.

Why does it matter?

You probably already knew that everyone has a different trading style, but whyexactly is this so important? Why should you care about how someone else trades? The answer is simple. People’s trading strategies affect their entries and exits. Entries and exits are buy and sell orders that affect stock price movement. Therefore, different trading strategies are responsible for the price movement you see every day. It doesn’t matter if you agree with someone else’s trading strategy or believe in its feasibility. What matters is that the person using the strategy believes in it and that belief will be reflected in the stock’s price action. Understanding how different traders are playing a stock will give you an edge. Let me give some examples:

Charting Example – I am neither a strict chart trader nor a strict fundamental trader. I use a variety of strategies when I trade and don’t overvalue any of them. That being said, some people have a method that works and they stick to it. I always have to remind myself that some people use stock charts religiously. When a stock is approaching a known support level during a down trend, there will be a lot of chart traders looking to move in for a dip buy. Maybe it is a self-fulfilling prophecy, but that doesn’t matter. All that matters is that you know what these traders are doing and act accordingly. If you know a stock will have heavy buying at support, you may consider an entry for a bounce. The same applies to resistance levels and technical indicators. It doesn’t matter if you believe in chart trading. What matters is that other people do and this will affect the price. Sometimes, I can be slightly cynical and expect the worst when a stock is moving towards its support levels. Are people really going to buy at that price when the stock is tanking? The answer is “yes” and when enough people do it, a trend is formed.

Penny Stock “Investors” – I would never consider a purchase of shares in a penny stock company a real “investment.” There is too much volatility, shadiness, and other random factors that make the investment risky. That being said, there are a lot of people who actually invest in penny stock companies. When I find companies with a strong, almost “cult-like” following, I take advantage of this. These investors lock up the float and provide support during big drops because they see the new share prices as a great value. Does this mean I am going to invest in the company? No. It means that I understand how other traders are thinking when they place trades, and that helps me plan my entries and exits.

So, let’s get straight to the point and go over some different trading styles that you should be aware of.

Popular Trading Styles

I will go over a few popular trading styles below. Some of them overlap, but try to focus on the psychology behind each style. Think like a person utilizing the strategy would think.
Day trader/scalper. The numbers are not exact and each trader within the subcategories will be slightly different. Just use this chart to understand the bigger picture.

What does this all mean?

Now, you have some data about some different kinds of traders and investors. This data is useless unless you find a way to incorporate it into your strategy. The best way to do this is to be conscious of other people’s trading styles and find a way to take advantage of them. For example, you may not be a “News Trader” but if you know there are people playing the news, you can get in on that trade and make a nice profit. You may be a “Value Investor” but your stock starts running up from momentum. You may want to take this time to sell some shares because you know some momentum traders will be selling soon. Knowing how other people trade can help make your strategy even more effective. This list only covers a few different types of traders and people can find themselves in more than one category. Think of some the other kinds of traders and put yourself in their shoes. Try to think like exactly like them so you can know their thought process and predict their future actions.

I started this article off with a reference to business and how important it is to understand the environment you compete in. If you run a business, you would want to know exactly what your competition is doing. You could replicate the positive things and avoid the negatives. Additionally, you could take advantage of your competition’s shortcomings. If you know your competitor is always closed on the weekends, you could run a marketing campaign telling people you stay open all week. The same logic applies to trading. Know other people’s trading styles, learn from their strengths, and take advantage of the insight you gain. If you know that everyone is going to run a stock up in a week on earnings, give yourself an edge and buy early. There are no definitive rules about how you should take advantage of other people’s trading styles. Get creative and start testing out strategies.