Most folks are familiar with the distinction between an investor and a trader.
Like Warren Buffett, an investor who looks for deeply valued stocks that can build massive returns over time – often decades.
Whereas a trader looks to exploit short-term moves in the market. The quicker that move, the better.
Identifying which of these two groups you fit into is a common starting point when you first enter the markets.
But if you decide you’re best suited to trading, that’s just another starting point in working out where you best fit into the markets.
Because working out what type of trading strategy suits your personality is vital to making it as a trader long term.
Today, I want to share how I found the strategy that suited me best.
And hopefully, that helps you get the most out of your trading…
Some Things Just Don’t Gel
Whether it is a social group, work group, or whatever, we’ve all been in situations where things just don’t gel.
Maybe it was the group dynamic and the personalities involved. Or perhaps the activities others were interested in didn’t grab your attention.
Whatever the reason, you didn’t feel the “vibe.”
Well, it’s the same thing with trading…
Traders typically get lumped together. But different types of trading strategies suit different people.
For whatever reason, some strategies click with some but don’t resonate with others.
Like on the trading floor of the Chicago Board Options Exchange, where I started my career 40 years ago…
One popular strategy was to do rapid-fire trades for a tiny profit. If you do those trades dozens of times each day, each small gain adds up to something much bigger.
For others, the speed of that strategy didn’t resonate at all. They were better off doing fewer trades but aiming to capture slightly bigger moves from each trade.
Trying to stick to a strategy that doesn’t suit you will generate a lot of frustration. And in the long run, you’ll fail to consistently make profits.
Worse still, you’ll likely churn right through your trading account and put yourself out of the game…
My Favorite Strategy
When I figured out the strategy that suited me best and put it into practice, I finally found my edge.
And my career really started to take off.
It led to me going 20 years without a down year. And Jack Schwager featured me in his book Hedge Fund Market Wizards.
While other traders tried to capture emerging short-term trends, I found that I was far better at picking when those trends reversed.
That’s called a “mean reversion” strategy.
The metaphor I like to use is a rubber band. You can stretch it out more and more – but eventually, it will snap back. Stocks often behave in a similar way.
When a stock rises (or falls) too much, too quickly, then there’s often a mean reversion opportunity there.
And I learned how to take advantage.
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There’s No Right or Wrong
One of the places I look for mean reversions is within the major indexes.
When the S&P 500 rallies too far and becomes overstretched, I look to profit when it retraces back the other way.
But I soon was able to apply this mean-reversion concept further…
Often, big indexes move somewhat in sync.
So if the S&P 500 rallied strongly but the Dow Jones lagged behind, I could buy the Dow in anticipation of it “catching up.”
In this case, the mean reversion refers to the relationship between two indexes.
This strategy suited me so well that I’ve used it to great success for decades. And I still use it regularly today for subscribers to my various advisory services.
For example, we used this strategy earlier this year in my One Ticker Trader service by trading the SPDR Dow Jones Industrial Average ETF Trust (DIA).
The aim was to capture a rally in the Dow after it lagged behind the S&P 500 and the Nasdaq.
Our first trade generated a 66.9% blended gain in just six days.
And our second trade fared even better, with a 100% profit in six days.
The thing to remember is that there’s no right or wrong as to which strategy is best. Instead, it’s a case of which one gels with you best…
Find out which strategy best fits you, and your trading results will really take off.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict