Are you a warrior in options trading?

Before we start on our options trading journey, we need to understand the various styles of equity or options traders. This is because one of the most confusing aspects of the trading profession is there is no single definition of "traders". Traders come in many different styles, sizes, behaviors, characters and varieties.

Professional options traders will generally undertake one of several styles and stick only to that style. This is an important point since traders are always at the risk of being distracted by various market commentaries, analysts’ opinion and conflicting trading styles.

Find out which types of trading warriors you are.

1. Fundamental Warriors

Fundamental trading is a method by which traders focus on company-specific events to determine which stock to buy and when to buy it. Trading on fundamentals is more closely associated with the buy-and-hold strategy of investing than short-term day trading. There are, however, specific instances in which trading on fundamentals can generate some nice profits in a short period.

This type of traders trade companies based on fundamental analysis, which examines things like corporate events such as actual or anticipated earnings reports, stock splits, reorganizations or acquisitions. One of the richest man in this planet earth, Warren Buffett, is famous of investing in companies which are underpriced based on some form of fundamental analysis.

Most of the equity investors are aware of the most common financial data used in fundamental analysis: earnings per share, revenue and cash flow. These quantitative factors can include any figures found on a company's earnings report, cash-flow statement or balance sheet; these factors can also include the results of financial ratios such as return on equity and debt to equity. Fundamental traders may use such quantitative data to identify trading opportunities if, for example, a company issues earnings results that catch the market by surprise.

2. Swing Warriors

Swing traders are really fundamental traders who hold their positions longer than a single day. Most fundamental traders are actually swing traders since changes in corporate fundamentals generally require several days or even weeks to produce a price movement sufficient enough for the trader to claim a reasonable profit.

Swing trading is actually a mix of day trading and trend trading. A day trader will hold a stock anywhere from a few seconds to a few hours but never more than a day; a trend trader examines the long-term fundamental trends of a stock or index and may hold the stock for a few weeks or months. Swing traders hold a particular stock for a period of time, generally a few days or two or three weeks, which is between those extremes, and they will trade the stock on the basis of its intra-week or intra-month oscillations between optimism and pessimism.

3. Technical Warriors

Technical traders are obsessed with charts and graphs, watching lines (esp support and resistant lines) on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals.

In general, a technician is somebody who looks back in history, using the recognizable patterns of past trading data to try to predict what might happen to stocks in the future. This is the same general method practiced by economists and meteorologists: looking to the past for insight into the future.

4. Momentum Warriors

Momentum traders look to find stocks that are moving significantly in one direction on high volume and try to jump on board to ride the momentum train to a desired profit. Momentum traders may hold their positions for a few minutes, a couple of hours or even the entire length of the trading day, depending on how quickly the stock moves and when it changes direction.
By watching the momentum line, the momentum trader has already engaged in technical analysis, examining stock charts for signs of the breakout. However, the technical indicators used in momentum trading are very limited and only the tip of the iceberg compared to technical guys.

5. Scalping Warriors

The scalper is an individual who makes dozens or hundreds of trades per day, trying to "scalp" a small profit from each trade by exploiting the bid-ask spread. Scalper generates trading profits from stocks that are not moving, make tiny profits from each trade by buying a stock on the bid and then turning around and selling at the ask.

Personally, I am a fundamental warrior because I do play earning during peak season. At the same time, I am a momentum day trader riding on the wave when I see signals to enter and exit.

How about you?

It is very common that options traders are constantly soul searching and questioning their own chosen approach. Novice traders might try and test each of these techniques to find their style. Some experimentation is advisable, particularly at the beginning of the options trading career, but deviating from a disciplined, focused approach can be disastrous later when we are establishing our style.

At the same time, there are a lot of options trading related books entirely devoted to each style, although many titles such as "Day Trade Online" or "How to Get Started in Electronic Day Trading" are unclear about what type of trading they are deploying.

Ultimately, it is critical that we settle on a single niche, matching our investing knowledge and experience with a style to which we feel that we can devote further research, education and practice.

Happy trading!

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