Directional Trading Vs Non Directional Trading

ALL trading ultimately falls under one of two categories, directional trading and non directional trading. Each has its own advantages and disadvantages.

Most people will debate over which way is better, but the truth is people are able to make a great return using either method. Before we compare them let’s look at what they are.

Directional trading is the most familiar to the common person, you buy a stock it goes up and you make money. The stock has to go in the direction you chose for you to be profitable.

Non Directional Trading In this type of trading the stock does not necessarily have to go in the direction you want, it only needs to not go against you too far. For example you sell a $45/$40 bull put spread on a stock trading at $49 and make $1.50. The stock only needs to stay above $45 for that trade to become profitable. So even if the stock goes down to $45.01 you still make your max Profit.

Benefits of Directional Trading

The benefits of trading directionally are

*Higher potential, your max profit is not limited like it would be if you sold a credit spread.

*Better Risk to Reward Ratio, when you sell options you will always be risking more then you can make, when you buy stocks or options you can have risk reward ratios of 2/1, 3/1, or better, giving you an edge.

*Keeps you on your toes, when you sell options it is easy to “forget” to manage your risk because your probabilities are so high. This could ultimately lead to your downfall. On the other hand when you buy a stock or option you need to constantly manage your positions which can save you from catastrophic losses.

Benefits of Non Directional Trading

The benefits of trading non directional are

*Higher Probabilities, when you sell out of the money options the probabilities are already on your side. Selling options can lead to you being correct 80% of the time or more.

*Easier to Gain Confidence, because it gives you higher probabilities it is easier to get started making money, which in turn gives you higher confidence. And that is always good.

*More Consistent, buying stocks and options is anything but consistent. You can be up big one month and down big the next. But selling options is pretty consistent, to the point where to can guess how much you will probably make this month. Draw downs occur, but they are less frequent. Which One?

So, which one is for you? That depends on the individual. If you want smaller more consistent gains that add up non directional trading may work for you. If you would be willing to forget about consistency to attempt to make the big 200-300% gains here and there then directional trading may fit your personality better.

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