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Profit from Forex Trading Using Different Trading Styles

forex trading styleWhen compared with other financial markets, foreign exchange is the biggest and most liquid market in the world. Over 5 trillion dollars are traded on a daily basis, and this tells much about the daily liquidity at stake. Not all currency pairs are traded on a constant basis, as trading volume differs depending on different currencies and different currency pairs, and this is one thing that drives traders to use different trading techniques. Of course, that liquidity is just one thing to consider, and actually is not even that important. The most important factor is the time horizon a trader has in mind for the open trades, or for the profit to be reached. Based on this time horizon, there are different trading styles to be used, all of them with advantages and disadvantages – but there is something suitable for each and every trader’s personality.

Three Major Trading Styles

The first time a trader gets in contact with the Forex market, he/she tends to build different expectations based on the personality traits that person possesses. Some dream of getting rich fast, others dream of being able to trade successfully in order to drop their jobs and be their own boss, while others simply have too much money, and are looking to diversify their investments into a new market. No matter what the motivation, we can talk about the following three trading styles people use when selling or buying on the foreign exchange market.

Scalping

Scalping is a term that describes a short-term strategy for executing a trade. These traders are not looking for big returns in numbers of pips, but merely for small moves the market makes. In doing that, the trading set-ups are  taken from the shorter timeframes, like the 5-minute, and even the 1-minute, chart, and constant attention and focus is needed for perfect execution. Because this is a time-consuming process and requires a lot of attention, in order for this trading style to make sense, trading volume is bigger than normal. After all, as we have discussed here on the Forex Trading Academy, the value of a pip is strongly correlated with the volume of the transaction that is opened. The bigger the volume, the more valuable a pip is.

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So, if some trades are looking for a 100 pips profit from trading one lot, the same amount of money can be made by trading ten lots and holding the position for only 10 pips. Scalpers, as these traders are called, are looking for brokers that offer the fastest possible execution, little or no slippage, and, if possible, spreads close to zero. They do not care whether the account is a swap-free account or not, as they are not going to keep positions open overnight. While definitely rewarding, it is a risky strategy, as Forex markets tend to move quite fast at certain times, and one cannot exit a trade exactly at the desired level. Under this strategy, even 1 pip can make the difference between a 10% increase or a decline in profitability. To avoid this risk, traders do not open trades when important economic news is about to be released, but rather tend to trade in slow-moving sessions, like the Asian session is most of the time.

Swing Trading

Traders in this category are looking to hold positions until a take profit or a stop loss level is reached, or until a set-up is invalidated. This can take from a few hours to 1 day or even weeks, and it means analysis and expectations are not being built from shorter timeframes. These traders apply a top-down analysis to a currency pair, and their set-ups are on the 4-hour and daily charts, looking to fade specific fundamental news, and sometimes even trying to pick a top or a bottom. This is not an easy task, and patience is key here. The main advantage of this trading style is that traders are not glued to their screens in order to execute a trade. They are well aware of the levels the market is at and the news that is about to be released, and trade mostly using pending orders. They are very active when volatile events such as central banks’ interest rate decisions are being announced.

For these traders, the type of trading account doesn’t really matter in the sense that spreads can widen a bit and can be bigger than normal – and even swaps don’t really matter. What matters the most is execution and safety of funds, so these traders will not trade if the broker is not regulated and if the funds are not segregated to a custodial bank.

Investing

The last trading style appeals to traders who do participate in the foreign exchange market out of a passion for trading. These people are passionate about trading, but they have other activities/jobs/hobbies in their life that they don’t want to give up. For these traders, investing is the right approach. What these guys are doing is looking at the bigger timeframes only, starting from daily and ending with monthly charts, and trading accordingly. Over the weekend they look at the weekly closing, always consider the monthly closing as well, and have longer time horizons for a trade to reach take profit. These traders couldn’t care less about the news in front of them (second-tier data of course; not a central bank moving on rates, as this matters for all traders). What they do care about is adjusting the value of the pips to the necessary stop loss, and that’s about it. Swap-free Forex accounts are the ideal ones for traders in this category, as in the long run this strategy can be costly.

To sum up, no matter what the trading style and market expectations, trading should be made with a concrete plan in mind, and all these trading styles imply that a plan is already in place. The next thing to do is to successfully execute it.

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