Different Trading Styles
Forex trading can be done in multiple ways. There are so many things to be considered and so many possible approaches that this article should be a very long one. However, the idea behind this article is to group these possibilities and classify them based on what the everyday trader’s interests are. Based on that, and coupled with the human nature that governs trading, we can talk about different trading styles that define the approach one has to the Forex market.
Trading Styles Categories
The most important factor to be considered when thinking of a trading style is the time element. That is, how long one is willing to keep a trade open until the take profit is reached! Speaking about the take profit, this is a relative term. For some people, it is the actual level one is willing to exit a trade. For others, it is a line in the sand that must be reached based on some predefined patterns. The way one is looking at the take profit is the thing that defines the trading styles categories. Based on that, we can distinguish three different trading styles, with a small description to be seen below.
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Scalping it’s every trader’s dream! It stands for small profits realized in a very short time horizon! Human nature is very addictive to this kind of things, in the sense that everyone wants to make a quick buck in the shortest time possible. Yet, while there are some clear advantages, scalping has its draw downs.
As mentioned above, the main advantage is that profits are being made fast. However, don’t be tricked by that statement: losses can occur as fast as well. Scalping your way through the Forex market is to look for possible places where the market may bounce or slide and set a very small take profit, both in price as well as in time. Some traders are using this technique to make tens of trades daily, and this is also called as day trading or intraday trading. To scalp, it means to look at the lower time frames. One cannot use scalping techniques on the bigger time frames, and I dare to say that scalping can be made up to the hourly chart. The big advantage is that it comes with a very sound idea about what influences markets as traders are going down as much as to the one minute chart. Therefore, looking how the market is moving and putting an economic event or a technical level to it, makes the difference between winning and losing.
The main disadvantage to scalping is the fact that one is glued to the screens. If you really want to know, in trading, there is a saying, that the trader needs to put in the screen hours. This refers to the fact that markets need to be monitored so that one can react to the unpredictable events. It cannot be truer than in the case of a scalping approach! Another drawdown, and perhaps even more important than the one mentioned above, is the fact that scalping leads to overtrading. Small profits are not associated with small risks, so people engaged in this approach will often have the tendency to take bigger risks to gain a small profit. Most of the times, these risks are offsetting the potential profit, and this leads to overtrading. This is a mistake that in the end is going to lead to the account being wiped out.
Traders that belong to this category are looking at something else, both from a fundamental as well as from a technical point of view. The key here is the time horizon! When compared to scalpers, swing traders are having a bigger time perspective in mind. Therefore, the time needed for the trade to reach take profit can vary from a few hours to a few days and even weeks. Swing trading is very much associated with the concept of trading based on a top/down approach. This means to look at the bigger time frames, the biggest ones possible, analyze markets from a technical as well as from a fundamental point of view, and continue that approach on the lowest ones. It means that the analysis should be continued the lower time frames from the moment/place it was ending on the bigger one. This way, from the monthly charts traders, move to the weekly, daily and the four-hour ones.
This approach to trading the Forex markets has the big advantage that traders are always up-to-date with what is happening in the currency markets and the economic calendar is watched closely. Moreover, it allows traders to give room for the market to get rid of the fake moves and positioning in the right direction is easier. Swing trading is the most common way of trading the currency market!
Like any good stuff, swing trading comes with a draw down: when you’re wrong, you’re going to pay a dire price. This is especially valid if the approach is a fundamental one. Fundamental factors need time for the effects to be seen in the Forex rates, and this time is usually bigger than the time a swing trader is dedicating. To put this in one of Murphy’s laws, when the trader is giving up, the market will turn!
This trading style is dedicated to traders that do not really care about the day-to-day news or support and resistance levels on the lower time frames. This kind of people is looking for monetary policy shifts, for macroeconomics or geopolitical events to influence markets/economies, etc., and therefore the time horizon is a bigger one.
Investors have a different approach when trading the Forex market. They do not really care about the intra-day movements or the economic news that is released. This comes in a contrast with the other two categories mentioned above, but these traders are looking for the bigger picture, for what is likely to happen for the years ahead. This way, small swings the market makes or daily emotions are ruled out.
Staying on a trade for a long time is a tricky thing in the sense that at some point in time one is going to start questioning the logic. Moreover, there are some costs associated with this trading style. One of the costs, and perhaps the most important one is the opportunity cost. This refers to all the possibilities to trade the market in the other direction all the time when waiting for the take profit to be reached. The three trading styles mentioned above are the ones that truly define human nature and the way people approach markets. If you find one is more appealing for you than another, it is only meaning you are human and that is the category you are fitting in.
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- Macroeconomics in Forex Trading
- Geopolitical Risks That Influence Markets
- Types of Expanding Triangles
- Trading with X Waves
Recommended further readings
- “Trading styles and trading volume.” Nagel, Stefan. Available at SSRN 785345 (2005).
- Dealer behavior and trading systems in foreign exchange markets. Bjønnes, G.H. and Rime, D., 2005. Journal of Financial Economics, 75(3), pp.571-605.