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Generalist or Specialist Trading: How Wide is Your Net?

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February 10, 2015

Editor’s note: This is the first of a two-part Perspectives series comparing generalist and specialist approaches to trading the markets.

The term “generalist” is used to describe a person who is skillful or knowledgeable in a number of different areas, but not necessarily an expert in any particular one.

In the trading world, a generalist would be someone who is active in many different styles—such as day trading, swing trading, or positon trading—but with no particular preference among them.  It can also refer to someone who is comfortable trading all types of setups: long, short, breakouts, pullbacks, overbought, oversold, etc. 

In fact, many generalists believe that to truly be considered traders, they must be able to put on positions in all sorts of situations, even across different asset classes. They would just as soon put on a forex or futures trade as they would an equities trade.

This flexibility allows them to go where the trading is best.  If the market is overextended, they can look for stocks to short off of reversal patterns. If it is flat, they can write options combos that could potentially profit from low volatility.  If the tech sector is on fire, they can concentrate their efforts there and then seamlessly move to the next hot sector when sentiment changes.

The General Agnostic

Taking this approach to trading might seem overwhelming, because you would think that there is too much knowledge to be consumed.  By attempting to be “trade agnostic,” you run the risk of not reaching a minimum level of competency in enough areas to be profitable.

That’s why it is common for generalists to apply the 80/20 rule when approaching the markets. They know that only 20% of trading knowledge is specific to a style, asset class, or sector, and that 80% is universal. Therefore, they focus only on the 20%. 

This helps enable a generalist to understand how a big rally day in stocks affects the bond market, for example, and on that basis, possibly take a trade in bonds. The point is, you're arming yourself with enough general knowledge about how other asset classes function and interact to at least consider how another position would perform, without getting too deep into the nuts and bolts of a particular market.

In some ways being a generalist has its advantages, especially for those who don’t like to sit on their hands. Having a wide range of competency in the markets means that there will consistently be legitimate opportunities to trade, eliminating that deadly temptation so many traders fall victim to: placing trades out of boredom. 

But one thing most generalists don’t have are set hours. That’s because with everything out there, from currencies to futures to overseas markets, there is always someplace for them to trade, 24 hours a day.

Check Perspectives on Trading next week, when we’ll take a look at the antithesis of the generalist: the specialist.