The forex industry is booming every year, with more traders making their way into currency trading. Since its inception, forex has been evolving, and its roots are spreading, resulting in an incredible growth of this financial tree.
Trading styles are a part of this tree. It has different types, including scalping, day, swing, and position trading.
Scalping is a trading technique in which a trader gets in and out of the markets quickly, probably in a few minutes. Even a little price change is enough to determine the outcome of execution. It is essential to manage the risk in such a practice as a few significant losses can wipe out entire gains.
Scalpers are the people who choose scalping as their trading method. These traders have the following attributes:
- They prefer fast environments that complement their style.
- A good broker with low latency is their first choice. Scalpers need minimum latency in their executions to get in and out of the markets quickly.
- High spreads can eat up a scalper’s gains by a considerable margin. Therefore they only trade with ECN brokers or those with minimal bid/ask ratio.
- They may have a high win rate, which compensates for the low risk to reward ratio. These successive little gains compile up to a huge profit in the end.
- Scalpers have a fixed set time where they sit in front of the trading screen. It can range from a few minutes to a few hours. Mostly the traders get out once they achieve their profit target or daily loss limit.
- Due to the fast-paced style, they may use expert advisors to complement their trading.
Day traders thrive on the hourly, 4 hour, and daily charts. This form of trading involves buying and selling the asset within the same day. All the positions are closed in 24 hours to avoid unnecessary risks. Newbies or even amateurs may find it hard to day trade currencies.
These types of traders have the following key points:
- They look out for market news that may cause short term movements. The significant ups and downs in prices due to the fundamentals provide day traders with profitable trading opportunities.
- This type of trading requires substantial knowledge of markets. It is not for beginners or even amateurs, as stated before. A good idea of technical analysis and charts is preferable.
- A fair amount of capital is necessary for day traders to afford to risk the money they can lose. 1% of the full equity is put on the line on each transaction in forex by them.
- Low spreads and high execution speeds are always favored.
- Day traders, by far, have to be mentally sound at all costs. Psychology can play a trick at them as they may go through losing streaks and drawdowns. Strict discipline is mandatory for them.
- Day trading may be a bit stressful as traders have to keep their eye on multiple screens at once to spot opportunities.
Swing and day traders are often confused, with the former considered a branch of the latter. The fact is that swing trading is a whole different style, which includes holding your position for days or weeks. It is comparatively easier to trade in contrast with day trading.
Swing traders/trading stand out by the following characteristics:
- They don’t have to be on their trading screens all time due to the nature of time frames. Daily and weekly charts are their favorites, and such traders can even work a full-time job.
- These traders don’t require multiple screens or high-quality tools to carry out their executions. A simple setup is enough for them.
- Swaps are a major concern for them as they tend to hold positions overnight for several days.
- Lots of patience is necessary. People with little patience are advised to stay away from swing trading.
- The number of trades is fewer, but the overall gains are much higher, which compensates for trading frequency.
Position trading is the lengthiest form of staying in the markets as it involves holding your trades from weeks to years. It is the opposite of what scalping or day trading is. Position traders are more interested in trends that continue for a long time. They like to ride the waves within the market structure.
These traders have the following characteristics:
- Fundamental analysis is extremely important for them as any change in the interest rates, GDP, or other vital news can cause new trends. Technical analysis is also used.
- Support and resistance and the pullback are constantly under observation of these traders. They provide the best trading opportunities.
- They prefer brokers with low swap fees similar to swing traders.
- Unlike other trading styles, position traders have to spend the least time checking on their executions.
- Short term fluctuations in the market on lower time frames do not affect these traders. Higher time frames mitigate all the pressure from low intervals.
- As the positions are kept open for quite some time, it will not be wrong to say that position trading is intuitively risky.
Why are there different trading styles?
The various methodologies are present due to the diverse nature of every human being. Some traders are impatient and therefore choose to have a quick in and out approach in their trading. In comparison, others prefer stable circumstances, which may take days and months due to their huge patience.
It is crucial to select a style that matches your personality. It may be a tedious task for any new trader but remember that it’s vital for long-term success in the industry. One of the biggest mistakes made by newbies is that they continuously switch between one way and another. It is undoubtedly a one-way ticket to losing, so it is necessary to remain faithful to your trading style.