September 07, 2017
Each trader has his own preferences when it comes to trading. While some traders like to watch the markets all day long, and take many trades on a very short time-frames, other traders prefer to open a position and forget about it for months. Both of these trading styles have their names, the first is called scalping, and the second position trading. And there are a few more styles in between. So, let’s see what the main trading styles are in forex trading.
Scalping is a very exciting and fast-paced trading style, with the main objective to make small gains from many trades. Scalpers hold their positions open from a few seconds to a few minutes, and need to be able to change their bias quickly. They also trade only during the busiest market hours, when two sessions overlap (for example the 8:00 am-12:00 noon EST for the NY-London overlap), and need to be intensely focused on the market for a few hours.
Scalpers need to pay attention to spreads, as they take many trades during the day. That’s why they mostly focus on the most liquid currency pairs, such as EUR/USD, GBP/USD and USD/JPY which offer the lower spreads. In addition, they need to avoid trading during major news releases, as the wider spreads and slippage can work against them.
Day trading is also a short-term trading style, but with less trades than scalping. Day trading involves taking one trade per day, and closing it by the end of day with either a loss or profit. Day traders need their time to analyze possible setups at the beginning of the day, and deciding on which direction they will take. They need also to be aware of currency fundamentals, as they can have a significant impact on intraday trading.
Day trading practically includes several trading styles:
- Trend trading – taking trades in the direction of the overall trend. This also includes multiple time-frame analysis, as you need to see the bigger picture from the longer time-frame, and then move to the short ones to determine your entry point.
- Countertrend trading – trying to catch the end of a trend and opening a position in the opposite direction. This is a riskier style, but can return huge profits if you catch the beginning of a new trend.
- Breakout trading – trading the breakouts of major support and resistance levels. With breakout trading, you want to catch the break of major levels which can lead to a sharp move in price in the direction of the breakout.
This is a trading style where traders hold their trades for several days. They want to catch the “swings” in price, which can require several days or more to form. The following chart shows what swings are.
With this trading style, you want to catch these swing highs and lows, selling when a swing high forms, and buying when a swing low forms. Swing trading also allows for having larger stop losses, to account for the increased price fluctuation during the period of holding the position. This is a great style for traders who don’t have time to watch the market during the day, and are patient.
Position trading is a very long-term trading style, with trades that are open from several months to several years. Needless to say, this trading style requires a very patient and well-capitalized trader. Trades that are open for so long, have a high chance to go against you some time in the future, and require a large trading account that can withstand large price movements in the opposite direction.
Position traders need to fully understand currency fundamentals, as they are what move the market in the very long term. It’s important to understand concepts such as balance of payments, interest rate differentials, economic outlook and purchasing power parity. Unless you are really prepared to invest time in learning everything about currency fundamentals, you would be better off with shorter-term trading strategies.
Test Your Knowledge: Discovering Your Trading Style
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Discovering Your Trading Style
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Question 1 of 4
Scalping is a very exciting and fast-paced trading style, with the main objective to make small gains from many trades.Correct
Question 2 of 4
Day trading involves taking ____ trade per day, and closing it by the end of day with either a loss or profit.Correct
Question 3 of 4
Swing trading is a trading style where?Correct
Question 4 of 4
Position trading is best described by which of the following?Correct