What’s essential in trading is the decision of a trader. Vital as it serves as one of the basis whether a trade will turn out successful or not. For a trader to decide, he or she needs to be well-versed with trading styles.
After going through this article, one will be able to understand different trading styles. More so, weigh which method is appropriate in approaching the Forex market. This article also enumerates its advantages and disadvantages for a trader to develop a more constructed trading strategy.
Different Types Of Trading Styles
SCALPING- This kind of trading is of high frequency. Its goal is to trade actively to gain small and succeeding profits. Traders who usually use this kind of approach take advantage of the lowest prices to make multiple trades every day.
As this is a fast way of trading, trades happen within seconds or can last up to an hour. Scalping time frames are purely reliant on which technology used and on the market status.
Note that latency and price slippage can significantly affect scalping. If a trade is subjected to delay, it can result in a worse price. This denotes a significant difference between profit and loss. It is worth noting that out of all the trading styles, scalping is the most sensitive to changes in liquidity, and widening spreads.
PROS
- Plenty of trading signals and opportunities
- Low time contributes to the reduction of risks.
- Allows traders to gain profits frequently
- Higher chance of achieving profit targets
CONS
- False trading signals go with accurate ones
- Price movements are vague
- Higher chance of reaching stop loss
- Higher transaction costs
- Susceptible to latency, slippage, widening spreads, and platform malfunctions
- Demands longer screen time for trading, monitoring, and managing the trades
DAY TRADING- All trades which happen within the same day are considered as day trading. Thus, scalping can be classified as such.
Similar to scalping, day trading focuses on making frequent short term trades. Since this kind of set up happens within an intra-day period, all trades are closed at the end of the day.
Day traders are technical ones. Though this style is a technical-based approach, traders can still use economic and political news as bases in making decisions. Usually, day traders take advantage of several intra-day price trends that commonly appear in between Forex trading sessions.
Intra-day time frames are necessary as they also help day traders identify trading opportunities. With this, trading sessions can last from minutes to hours.
PROS
- Trading opportunities are always available
- Higher chance of acquiring profits since transactions are successive
- Higher probability of receiving benefits every day
- Increased chances of reaching profit targets
CONS
- A high amount of incorrect trading signals
- Higher chances of reaching stop loss
- Indefinite price movements
- Receptive to latency, slippage, widening spreads, and platform break-downs
SWING TRADING- This trading style allows traders to keep deals for a more extended time. This will enable traders to have more significant price swings.
One requirement if a trader wants to pursue swing trading is patience. This is due to longer time frames which usually last from weeks to months. Once the deal was placed, a swing trader must patiently wait for a viable price trend.
Chances of having an excellent opportunity in swing trade depend on the market status. Though this is the case, it is very likely to get two to three occasions per currency pairs within a week. It is also common in swing trades to have a stop loss of 50 to 100 pips.
Market analysis using a higher time frame is imperative for a trader to determine dominant price trends. This also gives traders an idea best time to open and close a trade. This type of trading is also suitable for people who opt-out of monitoring the market regularly. Aside from the chance of getting broader price trends, it demands less screen time.
Over involvement in the market, activity does not equate to higher profits. That’s why it is wise for traders to visit and check trades only if necessary. This is what is called over-trading.
PROS
- Trading signals and opportunities are more valid and accurate on higher time frames.
- Higher chance of getting more significant price trends
- Deals can gather interest from an overnight swap.
- Demands lesser screen time for managing and monitoring trades
- Reduces the chance of reaching stop losses
- Transaction fees are lower.
CONS
- A decrease in trading signals means a smaller chance of making profits
- A longer time is required to recover from lost trades
- A longer time is dedicated to trading ideas to unfold.
- Broader stop losses are required making deal sizes smaller
POSITION TRADING- This term can be used interchangeably with swing trading since they are very similar to each other. The only difference between them is that position traders go for broader market trends and keep deals longer than swing traders do.
Position traders are willing to hold trades that can last for months or even years. With this, position trading can be considered as an investment.
They disregard short term price trends and focus on weekly, monthly, or yearly trends. Market status, a country’s economy, and interest rates serve as their bases in making decisions.
As deals are kept longer, position traders take advantage of swaps to earn interest. This means that they prefer buying high yielding currencies and selling low yielding ones when trading.
PROS
- It provides infrequent trading opportunities.
- It gives significant trading signals.
- Higher chance of getting viable price trends
- Deals have a higher probability of earning interest from an overnight swap.
- Asks for lesser screen time in for trade monitoring and regulation
- Insignificant transaction fees relative to potential profits
CONS
- Fewer trading opportunities
- A considerable amount of time is required to recover from losing trades
- A trader needs extreme patience
Types Of Trading Strategies For Each Style
Trend Following
The most basic principle of trading is to buy one price and sell it at a better price. To be able to do so, a price must trend accordingly to the trade. Even with just a few pips involved.
The trading mentioned above styles is all trend following. Regardless of time frames, smaller patterns always exist in larger ones.
Trend following projects a more extensive view for traders. It is commonly used to identify the direction of a dominant trend and to look at the most viable price closely. This is also flexible as it goes with any trading styles that a trader wants to use. Once a trend progresses, and market conditions are right, scalping can eventually turn to a day or swing trade.
Mean reversion
This kind of strategy proposes that prices will eventually return to their average cost.
Present market conditions dictate the movement of supply and demand. In return, it pushes asset prices to whichever direction. When a price moved farther than expected, some correction will occur. This depends on participants’ perceptions and speculation if asset prices are low or expensive.
Mean reversion aims to know the mean value of the price. If a price moved farther, then traders will have an opportunity to trade it back.
PICKING THE RIGHT STYLE
The challenge of trading is to speculate the movement of prices. Concerning this, a trader needs to determine whether trends will carry on or head backward. No matter what, trade only if you think it will reduce losses and maximize the potential of having a higher profit.
Sometimes it is best to make succeeding trades, and sometimes it is best to do otherwise. A trader can analyze the short term time frame and conclude that there is a downtrend. However, if a trader analyzes a longer time frame, a price uptrend can be gleaned. This proves that trading is an inconsistent venture.
Limiting yourself to a specific approach will only restrict your choices in decision making. Traders need to be fluid on what style they will use since it gives them more extensive opportunities. Traders will have a higher success rate if they utilize multiple trading styles and as long as it is appropriate
It is better to cut trades as early as possible and prioritize winning trades instead.
Market conditions and trends are sudden and unpredictable. The ability to adapt and point out changes will give a trader a higher chance of succeeding. Only those that have convictions and knowledge, whether to open and close a trade will thrive. Engage only on trades that are congruent to your objectives. After all, purposes are trading compass.