How to Find Your Trading Style

Trading style is practicing your trading plan.

The important elements of trading center around risk, reward and trading technique or trading style. Trading style refers to what instruments to trade, whether you will be an active trader, how you will manage risk and whether you have a systematic plan that recognizes a trade, enter the trade with a stop loss, have rules for investment per trade and have clearly identifiable points for exiting a trade. Trading style is never about luck or guesswork.

Things You'll Need

• Spreadsheet program
• Historical data

Instructions

1. Choose an asset class, such as stocks, bonds or commodities. Each asset requires the trader to develop a style of trading consistent with the special aspects of that asset. Stocks, for example, can be traded with or without leverage and are intrinsically volatile. Commodities, such as meats, grains and metals, can be leveraged by a factor of 10 or more. Any investor must first decide if he has the funds sufficient to trade in these markets and whether he wants to leverage his trading bets. Beginning traders are strongly urged to avoid this path when learning to trade.

2. Study how asset classes rise and fall during short, intermediate and long-term movements called trends. Traders develop a trading style by capturing trends through trading strategies. Because of the cost of trading, more successful traders use intermediate and long-term trading trends. Successful traders download, from free or subscription sources, historical price data for bull, bear and flat trading periods for many types of assets. Test your best ideas on data manipulated by computer programs. Devise good trading patterns for bull and bear markets. Most trades will either have a minimal loss, or large gains with effective strategies. The net effect of gains and losses should prove to be consistent profitability.

3. Learn how to take losses. Traders quickly learn that the first loss is the best loss taken. Traders must be extremely disciplined and never let losses exceed 8 percent on any one trade, nor should any one trade exceed 1 or 2 percent of the entire portfolio value. This is important because markets spend much time in random movements, where buy and sell signals regularly appear and then quickly reverse themselves. This means that any trader without a disciplined loss approach will incur a large string of losses that might substantially reduce the overall portfolio.

4. Trade with different investment styles to promote diversification. Trading style refers to the ability of good traders to diversify risk. Diversify with different trading strategies. For example, use technical trading to choose specific entry and exit points in a trade. Use fundamental analysis to find major trends that will affect the market for months or years.

5. Attempt to find a style with which you are personally comfortable. Comfort with a trading technique implies you have confidence in the consistent performance of the buy and sell principles. Ignore popular styles or current trading phenomena if you cannot understand the trader's approach. Often a trading technique works phenomenally well for a short period of time and captures popular attention. As the trading style results decline, so does its popularity.

Tips & Warnings

• The cheapest and most effective trading strategy is to test sample data over many time frames, several bull and bear markets and different amounts of risk per trade.

References

• Futures Magazine: The Art of War and the Science of Trading

Resources

• NYSE Euronext: Glossary