Different types of online trading

January 5, 2010

The Obsessive as Position Trader

Position traders try to take advantage of specific events related to a stock, like a stock split or other important news that affects the price. They wish to capitalize on the short-term position and then exit. When anxiety is in check, disciplined traders like this kind of trading because it allows them to take advantage of their skill for doing research and staying up with the latest news.

To speculate does not mean to gamble wildly without any idea of what you are doing. Speculative or position traders go in fully informed and take the risk that their assessment of the information available will move the stock price within a specific period of time.

For example, knowing there is usually a run-up in price a week before Dell announces its earnings each quarter, speculators might buy Dell shares for just that period. Further, knowing that there is typically a drop in price after the earnings announcement, speculators may sell their shares just before the earnings release. Or, if they are a little more risky, take a chance that the earnings are good enough to further propel the stock. But the bet is for the short-term situation.

Because obsessive-disciplined investors keep close tabs on news of their stocks and learn their typical patterns, they are well-suited to be position traders, assuming they have the interest and the willingness to take higher risk. They have done research, which gives them the confidence to strike when the time is right.

The Obsessive as Longer-Term Investor

In terms of time horizon and trading frequency, the typical obsessive-disciplined type, who is not highly interested in the market or willing to face some anxiety, is ideally suited for intermediate- to longer-term trading. This means from months to years into the future. They don’t get too upset at the daily or weekly movements of the market, because their focus is on the long haul. Their patience serves them well in this regard.

The reality is that most who are obsessive-disciplined traders are most comfortable and have the most success when they do what they do best. And that is to carefully analyze stocks and, when ready, take positions and hold them for the long term. If you are a typical obsessive-disciplined type, clearly you are a horse who prefers a medium- to long-term course.

The Obsessive as Day Trader

Those who are pure obsessive types are clearly not the best candidates for super-speedy minute trading or day trading, at least as it is done by professional day traders.

Why? Because the unpredictability of it and quick decisions required make them just too anxious and uncomfortable. It just goes too much against their grain. And if they do trade more frequently, they prefer to do it in the comfort of their own office or home. They will not adjust well to the tense environment of a day trading room with dozens of other anxious people around them.

If they want to do more frequent trading, say, many trades per week, they will also have to overcome some of their basic conservative orientation. If they want to be day traders, they’re in for some serious jolts to their typical style.

They would have to learn to handle the anxiety and unpredictability that goes with it. And they would have to tolerate processing large amounts of data very quickly without being able to carefully analyze it, as is their preference. Then they would have to learn to make buy and sell decisions based on this data.

Along with these alterations to their style, they would also have to adopt at least a bit of the risk-taking, go-for-broke mentality that is the stuff of the skilled day trader. The successful day trader must be nimble, able to make decisions very quickly. They don’t have time to carefully consider their moves. They must react instinctively and be able to change directions on a dime. This is not an easy thing for the obsessive-disciplined type to learn. Most don’t even want to try.

Some can make the transition and are able to use their ability to show restraint positively in limiting the number of trades they make. They also have a good grasp on when to cut their losses and are less likely to lose their entire investment capital.

Another strength is that often they are quick learners. So, while going against their personality is tough, it is easy for them to learn the mechanics of day trading as well as the technical aspects. For example, they may learn a few stocks inside and out, knowing the typical daily patterns, trading ranges, and stay up on all the news of the company.

They may become specialists in trading only one or two stocks, achieving a measure of comfort and knowledge that allows them to dart in and out without too much anxiety. I ran into a number of obsessive types who did exactly this. As long as they did not venture beyond the one or two stocks, they were able to manage their anxiety.