There are lots of different trading styles out there: Momentum, Aggressive Growth, Value, Growth & Income and more. Some of these are more conservative while others are more aggressive.
But which one works best? Let’s take a look.
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.
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:
1) First it selects the top 20 Price Performers over the last 24 weeks.
2) Next, from those 20 above, it selects the top 10 Price Performers over the last 12 weeks.
3) Then, from those remaining 10, it selects the top 3 Price Performers over the last 4 weeks
How Did It Do?
- Over the last 5 1/2 years (2008 thru Aug. 23rd, 2013), this Momentum Style strategy gained an average annual return of 53.3% per year vs. the S&P 500’s 4.3%.
- Even during 2008, with the bear market in full swing, this strategy was up 9.5% while the S&P plummeted -37.0%.
- And so far, in 2013 (thru 8/23), it’s already up 52.6%, nearly tripling the S&P.
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. 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 a stock that’s low in its price recognition cycle or finding undiscovered gems is more to your liking.
So let’s take a look at the 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.
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?
- Over the last nearly 5 1/2 years (2008 thru Aug. 23rd, 2013), this Value Style strategy gained an average annual return of 16.6% per year vs. the S&P 500’s 4.3%.
- Like above, in 2008, during the worst of the bear market, this strategy was up 14.2% to the S&P’s -37.0%.
- And this year? So far, it’s up 25.8% to the market’s 16.9%.
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) is such that it 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 it provides 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 in 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 while this style will typically require a more hands on approach to monitor how these companies are doing, it can be well worth it when the method is hitting its stride.
And the #1 Trading Style Is…
…the style that’s right for you!
No one style is better than the other. They’re just different from each other.
And that’s fine.
So the number one trading style is the one that’s right for you, that picks the kinds of stocks you want to get into.
Because if you find yourself getting into stocks that are not in alignment with who you are or want to be as a trader, you’ll find yourself dropping that strategy the moment the market hits a rough patch. Or talking 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.
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:
1) Identify what kind of trader you are or want to become. This will help you find the style(s) that are 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.
2) 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.
3) Don’t give up. As mentioned above, the most successful trading strategies work best when you use them. Once you’ve identified 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.
Where to Start
You may want to look into our Research Wizard program. It can help you discover what kind of trader you are and what strategies work the best with your style. Pick and choose from the winning strategies that come with it (including a strategy that has averaged gains of +67.4% per year). Or create your own and backtest them to see how they would have performed in various market conditions.
You can do all this with our Zacks Research Wizard. I invite you to give it a try for 2 weeks free.
Thanks and good trading.
Vice President, Zacks Investment Research
Zacks VP Kevin Matras is our stock screening and backtesting expert. He also personally developed many of the built-in market-beating strategies that come with the Research Wizard.