There are lots of different trading styles out there: Momentum, Aggressive Growth, Value, Growth & Income, Dart Throwing, and more.
(Ok, Dart Throwing isn’t an ‘official’ style per se’, but I’m sure there are a lot of people who would fit into that category if there was.)
But the above styles are just a few of the many different styles that people fit into. This also includes the ‘All-Style Style’, which is really just a combination of some or even all of the different styles put together.
Some of these are more conservative while others are more aggressive.
But which one works best?
Let’s take a look at some.
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.
And there’s a lot of evidence to support the idea that stocks making new highs have a tendency of making even higher highs. Although this style of trade will likely carry with it a higher degree of volatility, it can be extremely rewarding.
For this momentum study we’ll use one of our strategies called Big Money Zacks.
This method, of course, finds stocks on the move. And aside from focusing on the best Zacks Rank stocks, along with a few other fundamental filters, the main drivers to this particular screen (once we’ve narrowed down the list) are as follows:
- First it selects the top 20 Price Performers over the last 24 weeks.
- Next, from those 20 above, it selects the top 10 Price Performers over the last 12 weeks.
- Then, from those remaining 10, it selects the top 3 Price Performers over the last 4 weeks.
How Did It Do?
- 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 so far in 2009 (thru the last full week of September), it’s up over 215% to the S&P’s 14.2%. (That’s right, 215%. As the market was rebounding more than 50% off of the lows, this strategy capitalized on that by getting in on some of the top performers.)
Wow!
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. That’s 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 stocks that are low in their price recognition cycles 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.
The value investor will typically need to have a longer time horizon because if that stock has been undervalued for a while (i.e., ‘ignored’), it may take a bit of time before that stock gets noticed and makes a move.
For the Value Style study, let’s use our strategy called R-Squared EPS Growth.
This one too uses the Zacks Rank, along with a unique way of finding trendline growth rates. (That’s where the name R-Squared Growth came from.) But don’t let the name fool you, this is a straight up value screen that keys in on different classical valuation metrics.
How Did This One Do?
- In 2007, this Value Style strategy increased by 11.2%.
- In 2008 (raging bear market), this strategy was up 14.2%.
- And in 2009 (thru the last full week of September), it’s up 36.2%.
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) 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, 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 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 you should expect some volatility in this style as well.
This kind of style will require a more hands on approach to monitor how these companies are doing. But, like the Momentum Style, the additional activity can be well worth it when the method is hitting its stride.
And the Winner Is…
All of them.
No one style is better than the other. They’re just different from each other.
And that’s fine.
The ‘best’ style is the style that fits the kind of trader you are or want to be.
And this is important because then you’ll be able to find the stocks that are in alignment with who you are and your risk tolerance.
If you’re an active trader looking for aggressive picks, don’t try and fit yourself into a Value Style or Growth & Income Style. You’ll quickly grow impatient and feel like you’re missing out, regardless of how good you do.
Likewise, if you’re more conservative and don’t want to trade quite so often, do not try and make a Momentum Style or an Aggressive Growth Style work for you. It won’t.
Why? Because if you are getting into stocks that are not in alignment with your style or beliefs, you’ll find yourself dropping those stocks the moment the market hits a rough patch. Or you might talk 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.
Part of the formula for success is to just do 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) 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. One 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.
You can do it. And to help you get started, you may want to look into our Zacks Method for Trading: Home Study Course. It’s a DVD/workbook set that guides you to better trading step by step. In it, 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 beat 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. We’re making it available to you at our cost, but only until Saturday night, October 3rd. Click here to learn more.
Thanks and good trading.
Kevin
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: Home Study Course.
