In today’s volatile stock market landscape, there are dozens of different types of trading specialists. Both amateur and professional traders often specialize in just one security, one style of trading, or trades of a specific size (measured in dollars or shares). Every trading strategy has its own world of terminology, reasoning, rule-making and history. After-hours and premarket trading, for example, take place outside of regular business hours and attempt to take advantage of large bid-ask spreads and unusual price action. But even for active traders who confine their buying and selling to regular market hours, the number of different approaches to profit-making are almost endless. Some of the most popular forms of stock trading include the following:
Scalpers are fast movers who attempt to locate favorable bid-ask spreads in an attempt to buy at or very close to the bid price and sell close to the asking price. Extremely calm markets are a favorite of scalpers, who don’t like to do their business in the midst of big price trends. Another key characteristic of scalpers is their reluctance to buy or sell large volumes of securities. They typically like to find favorable spreads that they can exploit and make a small profit on many trades. There’s no “big kill” in the world of scalping.
Both professional and amateur traders can specialize, which is a strategy of focusing on just one or two securities and studying their price movements over time. The goal of specialists is to gain deep understanding of how a particular company’s stock price behaves. Recently, thousands of specialists have sprung up around some of the major blue-chip offerings like Microsoft, IBM and Amazon. Specialists literally become students of a company’s financial performance and attempt to make infrequent trades that take advantage of relatively large price moves.
Day traders are “get in and get out” artists who never hold their positions after the market closes. They end each day “in cash,” as the saying goes, and for good reason. Often making dozens or even hundreds of very small trades in a session, day traders often make big killings on major price moves. Day trading has caused many amateur traders to go broke and most brokerages have strict financial requirements for anyone who wishes to engage in day trading.
Traders who don’t like to buy or sell individual stocks gravitate toward index trading. Common indexes include weighted averages of an entire exchange’s, or a sector’s, securities. One of the most popular index offerings is the Dow Industrials Index, which moves in accordance with the entire Dow Jones list of 30 industrial stocks. Index traders have the ability to short the market when they think bad times are ahead for the economy in general. Likewise, when they perceive that the market is in for a great session they can go long and enjoy the upward ride. One of the big advantages to index trading is the avoidance of day-to-day problems that often-beset individual companies. It’s safe to say that index traders are the exact opposite of specialists.