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One of the keys to successful investing is to identify what kind of trader you are or what kind of trader you want to be.
This is important so you can select the right kinds of stocks that fit your own risk to reward ratio and investment style.
What's interesting is that so many people believe they're one kind of investor when in fact they are something totally different.
So before you say you're a Growth Investor or a Value Investor, or etc., ask yourself:
What kind of stocks do you want to be in?
Are you looking for:
- High flyers and fast movers?
- Stocks with big earnings momentum or aggressive growth?
- Or maybe solid companies with dependable growth?
- Or mature companies with income producing dividends?
- Maybe you're looking for deeply discounted or undervalued stocks?
What kind of characteristics do you want your stocks to have?
- Great management as reflected by a strong ROE?
- Maybe big earnings growth or earnings surprises?
- Or companies with a Zacks Rank of 1 or a 2?
What do you want your stocks to do for you?
Of course make money. But how?
- To make fast money by getting in and getting out quickly?
- Or to find long-term core holdings?
- Are you looking for stocks to generate income?
- Or are you looking for a medium-term trading strategy to actively pick stocks
and grow a portfolio?
These are great questions to ask yourself.
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You may also want to reflect on your current holdings and ask yourself if your answers are consistent with what's actually in your portfolio.
To make it easier to identify what kind of trader you are, let's define what the 4 main fundamental trading styles are:
Growth & Income
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.
And there's a lot of evidence to support the idea that stocks making new highs have a tendency of making even higher highs. But, this style of trade will likely carry with it a higher degree of volatility.
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 oftentimes find smaller cap stocks in this category. Expect volatility in this style as well.
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 corrects the price or, in other words, goes higher.
The value investor will typically need to have a longer time horizon because if that stock has been undervalued, i.e., 'ignored' for a while, it may take a bit of time before that stock gets noticed and starts to move meaningfully higher.
Growth & Income:
Growth & Income investors and traders are looking for good companies with solid revenue that pay a good dividend. Often times these are more mature, large-cap companies that generate solid revenue. These companies then pass that revenue along to their shareholders in the form of a dividend.
This kind of investor will also have a longer time horizon, especially since you'll want to hang onto your stocks long enough to receive the dividend.
'All Style' Style:
This combines the 'best' of any and all trading styles together into one. This is probably the category most will fall into.
Combining the best of different styles can be a style unto itself, like Growth and Value for example.
Simply put, it's important to identify what kind of trader you are so you and your trading strategy are in alignment.
Nobody ruins their account when the market is going straight up. (Well, maybe some do.) But usually it's when the market is going down that people get into real trouble.
Ironically, most of our bad habits were developed in good markets. Because when the market is going up, even some of the crummiest stocks and dumbest decisions can get rewarded in a bull market. But in a bear market, they will get absolutely punished.
One portfolio-ruining bad habit is hanging on to your losers too long.
In a bull market, many pullbacks were met with rebounds and then higher prices.
But in bear markets, many pullbacks are met with even bigger pullbacks, and then even bigger pullbacks still.
Unfortunately, many traders are reluctant to sell a stock at a loss. 1) They don't want to take a loss. 2) They fear that if they get out, and it goes back up, they'll miss out on any potential gain.
But, if you're unwilling to cut a loss at -10% or -20% or -30%, would you really feel better with a -50% loss or having to cut your losses at an even bigger and more painful amount once it reaches a point where you just can't take it anymore?
Additionally, if you know you'd ultimately sell your stock if it fell -30% or -40%, etc., why not just sell your stock at a more painless area prior to that, without doing any real damage to your portfolio? It's easier to recover from.
And don't worry about missing out on a stock if it starts going back up. Simply give yourself permission to get back in if there's a good reason to do so.
But understand where you'll pull the plug on a failed trade and move on to something better.
This will also help you stay focused and not get down on yourself or get gun-shy on your next trade.
But this is why you need to know what kind of trader you are and what your risk tolerance is, along with where you'll get out if a trade doesn't work. If even the slightest loss on a stock has you tossing and turning at night, you likely will not want to be filling up your portfolio with momentum stocks or aggressive growth stocks.
- Determine what kind of trader you are.
- How often do you want to trade?
- How many stocks will you hold in your portfolio?
- What's your risk tolerance and where will you get out of a loser?
- Where will you get out of your winners?
- What are your goals in your investing? Is this for fun? For retirement? Kid's education? Income? In other words, what are you investing for?
Whatever your investing style is and regardless of the market, you can learn how to become a better investor today.
What to do next?
You may want to look into our Zacks Method for Trading program. This interactive home-study course includes everything you need to find the best stocks and make yourself a more profitable trader. We go over in detail how to identify what kind of trader you are, how to find those stocks with the right style characteristics and how to trade them so you can consistently outperform the market. 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.
If you're interested, be sure to check it out now.
Click here to learn more.
Thanks and good trading,
Zacks VP Kevin Matras is our chart patterns and stock screening expert. He runs the Research Wizard and personally developed many of its built-in market-beating strategies. He also directs the Zacks Method for Trading.