There are many different types of traders and one way you can classify them is by the basic concept that they trade. Chapter 5 of the new edition of my book Trade Your Way to Financial Freedom presents nine different concepts that you can use to trade. And each concept is carefully explained by an expert in the area. Some concepts are diametrically opposed (i.e., trend following versus band trading) but you can trade any of them if you believe in it enough and practice the low-risk idea concepts presented in the book.
The first concept presented is trend-following. The basic idea here is that you buy what's clearly going up and sell it when it stops. Similarly, you sell-short what's clearly going down and you buy it back when it stops. And the key to doing so is practicing low-risk ideas and having some method by which you define when to enter and exit according to this concept. (And those ideas are discussed extensively in other chapters of the book).
The next concept is fundamental analysis. The basic idea here is based upon the supply/demand concept in economics. You need to analyze the market for where demand may exist and buy that (ideally, before it occurs). And when you think the price is high enough that demand might drop off, you sell it. Now you could assume that when the supply is low that demand will increase and start the market moving, but that isn't always the case. Let me give you an example in an area that I know well, rare U.S. stamps. There are certain 19th century stamps that were issued in a very limited supply and less than 100 are know to exist. However, there isn't much demand for these stamps, so the prices on these stamps are pretty reasonable. On the other hand, if just 50 collectors were willing to spend $100,000 on very rare U.S. 19th century stamps the prices of these stamps would go up 10 fold or more.
Value trading is the next concept and it basically says that you buy things that are way undervalued, assuming that one day the market will catch up with value. There are probably 1000's of ways to value stocks and some are more useful that others. And if you decide you like value trading, then your job is to find one of the more useful methods, some of which are suggested in the chapter.
Band trading makes the assumption that certain instruments (stocks or commodities or currencies) trade in bands. You buy something when it touches/crosses/gets close to the lower band and sell it when it does the same for the upper band. And it doesn't matter which order you do it in. However, the key to band trading is to understand how to develop useful bands.
The next concept is how to trade seasonal tendencies. Perhaps the real key to understanding seasonal tendencies is that what you find must have a fundamental basis of its existence. You can always use a computer to find meaningless correlations, such as if you'd bought XYZ in the last week in March, it went up for the next three days in 18 of the last 20 years. That could easily be a statistical fluke. What you are looking for is more like, "The stock market tends to go up between November and May because pension money tends to pour into the market during that period."
Spreading really gets into the realm of the professional trader who can create long and short positions with a lot of potential to move but with a much lower risk profile. For example, you can buy a December option and short the March option. You can buy one currency and short another. These are common practices among professionals who can do large trades very cheaply.
Arbitrage is another area that is practiced primarily by professionals. Here you find some loophole in the way things are done that gives you a huge edge. For example, one of my clients discovered (before currency trading was available) that he could buy sugar in London in pounds and in New York in dollars. Thus, he would spread the two markets in order to trade the dollar pound relationship and he was the only one doing it. He said that in those days that he'd have to unload one of his spreads if anyone wanted to trade sugar. Of course, this didn't last too long because people figured out what he was doing. But while it lasted, he said, it was like taking candy from a baby. The secret to arbitrage, of course, is to be able to find the loopholes and to be able to figure out how to capitalize on the loophole.
The next concept is Intermarket Analysis. Here, we make the assumption that the price of one commodity (or product) is a function of what many other commodities are doing at the same time. It's not just a simple relationship between a few things. Thus, gold might be related to the price of oil, silver, the dollar, and a number of other currencies. And these relationships change over time. Thus, the key to trading this concept is being able to simultaneously evaluate a number of different inputs to find the relationships that currently exist. And, of course, this just sets up the relationship that now exists, you then have to practice the key low-risk idea concepts common to all concepts to make money from the relationship.
The last concept presented in chapter 5 is the "there is an order to the universe" concept. Here there are a number of sub-concepts including: 1) waves of human emotion; 2) physical events that might influence human behavior; and 3) a mathematical order to the universe. Any of these concepts can be traded if they fit you and you practice the appropriate low-risk ideas.
One thing I found in common with all of these concepts is that they basically describe the setups that one might have for entry. Setups are such a small part of trading, but because people think that "picking the right investment" is so important, all of these types of concepts were developed. And trading styles are actually named after the setup.
