Trading Lesson 6

What type of trader are you?

While there are classic definitions of the various traders I have broken traders down into three categories, Day trader, Swing Trader, and Position Trader.

I consider a day trader as someone that is attempting to make a maximum amount of profit with the least exposure to risk. While many of you consider yourselves day traders--- you day trade the e minis or the DAX, you fail to meet the criteria of "least exposure to risk".

For some odd reason you feel that by solely minimizing your tick lossess and having a set tick daily profit you are reducing your risk exposure. Unfortunately, in practice, attempting to make $500/ day is a lot more difficult, and while you are limiting your lossess you find yourself being whipsawed, with little or no clear direction.

The solution to the problem is quite simple. In order to limit your risk exposure you must also limit your activity. Do not flip between being a long or a short, have a bias, and only trade the signals that confirm that bias. So if you have a long bias only execute buys in the market. If you have short bias only execute shorts in the market. By focusing your efforts you will be able to extract more opportunity from each instance.
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The Swing Trader has a different set of problems. I define swing traders as top and bottom pickers. They are traders that are looking to buy at the bottom or sell at the top, with the expectation that the move will exhaust itself once it reaches a prior top or bottom. The problem with swing traders is that they have no staying power during market flucutuations. There will be pullbacks as a market makes it way. The average swing trader has an incomplete tool box in order to deal with these temporary set backs and stops simply are not good enough.

The solution for the swing trader is two fold. First take the time to identify former tops and bottoms that you are targeting too, second have a plan when you are wrong. Synthetics and spreads are just two ways to be prepared buy are underutilized.

Finally, we have the position trader. This trader, come hell or high water, has a long term bias of the market and won't shake it loose. Look at oil, gold, and the euro for just a few examples where position traders made out like bandits. For a position trader there is no top, no bottom. The problem that the average trader faces in becoming a position trader is capital. The ability to hold on to your positon in the face of extreme movement against you can be devastating and can be a sure way to have margin calls staring you in the face. In order to weather such extreme movement you must be familiar with concepts such as hedging and option stops.

No matter what type of trader you are, or hope to be, find out how to protect yourself against your losses first and let the profits take care of themselves

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