<Countertrend Trading>
A countertrend trading style makes money when markets are not
trending by using a strategy that is the opposite of trend following.
Instead of buying when markets make new highs, traders who use
countertrend strategies sell short at prices close to the same new
highs, counting on the fact that most breakouts of new highs do
not result in trends. In Chapter 6 we will look at the market
mechanisms that are the source of profit for countertrend trading:
support and resistance.
<Swing Trading>
Swing trading is essentially the same as trend following except that
it targets shorter-term market moves. For example, a good swing
trade may last three or four days instead of several months. Swing
traders often look for patterns in price movement that indicate a
higher likelihood of a significant short-term price movement in one
direction or another.
Swing traders tend to use shorter-term charts that show price bars
for every five minutes, fifteen minutes, or every hour. On these
charts a large three- or four-day move will appear the way a three to six-month trend does on a daily bar chart.
<Day Trading>
Day trading is not so much a style as it is a reference to the
extremely short-term time frames involved. A true day trader looks
to exit the market before it closes each day. This makes his or her
position less susceptible to large adverse moves spurred by news
occurring overnight. Day traders generally use one of three different trading styles: position trading, scalping, or arbitrage.
Day traders generally use a style such as trend following or countertrend trading but do it over a much shorter period. A trade may
last a few hours instead of days or months.
<Scalping >
Scalping is a specialized form of trading that was once the
domain of only those traders on the floor of the exchange. Scalpers
are looking to make the difference between the bid and the ask,
which is known as the spread. If gold is $550 bid and $551 ask, a
scalper will be looking to buy at $550 and sell at $551. For this reason scalpers create liquidity by bidding and offering, hoping for a
balance of buy and sell orders.
<Arbitrage Trading>
Arbitrage is a form of trading that capitalizes on price differences in the same market or in very similar markets. Often these
markets are traded on different exchanges. For example, an arbitrage trader may buy gold on the Comex floor at $550 and sell
five e-mini gold contracts on the CBOT’s globex exchange for
$555 to capture a very short-term price mismatch.