There are lots of different trading styles out there: Momentum, Aggressive Growth, Value, Growth & Income, and more. Some of these are more conservative while others are more aggressive. But with today's volatile market, which one works best? Let's take a look.
Momentum Style
Momentum traders look to take advantage of upward trends (or downward trends) in a stock's price or earnings. They believe that these stocks will continue to head in the same direction because of the momentum that is already behind them. This method of course finds stocks on the move. In 2007, this Momentum Style strategy gained 36.8% vs. the S&P 500's 4.1%. In 2008 (with the bear market in full swing), this strategy was up 19.7% while the S&P plummeted -36.4%. And in 2009, it was up over 224% to the S&P's 22.4%. As the market was rebounding more than 65% off of the lows, this strategy capitalized on that by getting in on some of the top performers. This year in 2010? It's already up 36.1% in comparison to the S&P's -2.5%.
So is this the best style? Maybe for some. But maybe not for others.
The Momentum Style is typically a short-term trading strategy. And this method was designed to be rebalanced once a week, which means you'll be buying and selling new stocks every week. Great if you're an active trader.
Not so much if you aren't. You'll also find yourself getting in on stocks that have already made big moves or that are making new 52-week highs. And it works. But for some, high flyers and fast movers aren't the kinds of stocks they want to get into. Maybe getting into a stock that's low in its price recognition cycle or finding undiscovered gems is more to your liking.
So let's take a look at the Value Style.
Value Style
Value investors and traders favor good stocks at great prices over great stocks at good prices. This does not mean they have to be cheap stocks in price though. The key is the belief that they're undervalued. That they are, for some reason, trading under what their true value or potential really is. The value investor hopes to get in before the market 'discovers' this and moves higher. In 2007, this Value Style strategy increased by 11.2% to the S&P 500's 4.1%. In 2008 (raging bear market), this strategy was up 14.2% to the S&P's -36.4%. In 2009, it was up 44.8%, doubling the S&P's 22.4%. This year it's up on average of 9.2% so far while the S&P is down more than -2.5%.
So let's take a look at the Value Style.
Value Style
Value investors and traders favor good stocks at great prices over great stocks at good prices. This does not mean they have to be cheap stocks in price though. The key is the belief that they're undervalued. That they are, for some reason, trading under what their true value or potential really is. The value investor hopes to get in before the market 'discovers' this and moves higher. In 2007, this Value Style strategy increased by 11.2% to the S&P 500's 4.1%. In 2008 (raging bear market), this strategy was up 14.2% to the S&P's -36.4%. In 2009, it was up 44.8%, doubling the S&P's 22.4%. This year it's up on average of 9.2% so far while the S&P is down more than -2.5%.
This strategy was designed to have a longer holding period of 4 weeks, which means this strategy would be rebalanced essentially once a month rather than once a week. Moreover, the very nature of the screen (and the Value Style) is such that it tries to reduce volatility and minimize risk while at the same time outperforming the market. And while this more conservative style may not produce the kinds of triple-digit returns that a Momentum Style or an Aggressive Growth Style can, the smoother ride it provides while still outperforming the market may be just what you're looking for. Or maybe a Growth & Income Style approach with core holdings that pay nice income-producing dividends is what you're really after. This kind of strategy will tend to focus in on the more mature companies with solid revenue and consistent payouts. You'll also have a longer time horizon with this style (at least 12 weeks), especially since you'll want to hang onto your stocks long enough to receive the dividend. Then again, the allure of getting in on a newer company and watching it blaze a trail of success, as an Aggressive Growth Style will try and find, may be your goal instead. Aggressive Growth traders are primarily focused on stocks with aggressive earnings growth or revenue growth (or at least the potential for aggressive growth). You'll often find smaller-cap stocks in this category. And while this style will typically require a more hands-on approach to monitor how these companies are doing, it can be well worth it when the method is hitting its stride.
So, the #1 Trading Style the one that's right for you! No one style is better than the other. They're just different from each other. And that's fine. The #1 trading style is the style that fits the kind of trader you are or want to be. Because if you find yourself getting into stocks that are not in alignment with who you are or want to be as a trader, you'll find yourself dropping that strategy the moment the market hits a rough patch. Or talking yourself out of winning trades altogether, because you're uncomfortable being in stocks that don't fit your style. The Strategies Work Best When You Use Them. The best trading strategy in the world won't make you any money if you don't use it. And the more confident you are in your strategy, the more apt you will be to use it. To build confidence in your trading, remember to first:
Identify what kind of trader you are or want to become. This will help you find the style(s) that are right for you. And don't worry about fitting perfectly into one style or another. Many people will be a combination of several styles rolled into one.
Identify what kind of trader you are or want to become. This will help you find the style(s) that are right for you. And don't worry about fitting perfectly into one style or another. Many people will be a combination of several styles rolled into one.
Once you understand the different styles and where you fit in, you can then concentrate on what kinds of items will help you pick the stocks that have those characteristics so you'll always get into the right ones.
Don't give up. As mentioned above, the most successful trading strategies work best when you use them. Once you've indentified your style and the method to pick those stocks, make sure to follow a proven profitable trading strategy to increase your odds of success. This will give you the confidence to stick with it and to maximize your returns. It also goes over some of our best performing strategies from all of the different trading styles and shows you how to create your own.
