Trading Styles
The trading style you choose is directly correlated to the time you are able to devote to trading.
Short-term Trading Styles
Scalping
Daytrading
Long-term Trading Styles
Swing trading
Position trading
Scalping
Characteristics
Traders open and close trades within a very short time scale, from seconds to several minutes.
Scalpers tend to make many trades a day, perhaps even hundreds.
They look for tiny profits on each trade (10, 5 or even less pips). Losses are also minimal.
This type of trader often trade large positions.
Scalpers often trade based on momentum, when there is a sharp move.
Time required devoting to such strategy: Scalping requires staring continuously at the screens for several hours. This strategy also requires constant focus.
Charts to look at: 1 minute
Advantages:
Minimal risk per trade
High system accuracy
No fundamental analysis is required
No overnight event risk
Many opportunities each day
Disadvantages:
Very high level of emotional stress and psychological pressure.
Broker must have a fast execution service.
This strategies usually have low RR ratio
Most brokers don’t like scalpers (sometimes the put them into manual execution service, a dealer execute his or her trades)
High transaction costs. If a scalper makes 20 trades in the Euro and pays 3 pips of spread, he will pay $600 for spread on that day.
Common strategies:
Breakout strategies (from short term consolidation periods)
Quick bounces from support and resistance levels
News and event trading (i.e. at a news announcement report)
Daytrading
Characteristics
Trades are opened and closed during the day, these trades last from a couple of minutes to a whole day
This type of trading requires a high level of discipline and patience to wait for the right moment to enter the market.
Most daytraders base their trades on technical analysis.
Frequency of trades can go from one to five trades a day.
Daytraders try to capitalize from the trend of the day
Time required devoting to such strategy: daytraders are required to monitor constantly the markets to time entries and exits. Not advised for those who have day jobs.
Chart to look at: 5 minute to 30 minute
Advantages:
High potential for returns
Daytraders can use a high RR ratio
Able to capitalize on short term trends
No overnight risk
There is always another opportunity to make money
Disadvantages:
Requires a systematic approach
A high level of discipline and patience are required to trade this way.
Different strategies should be used for different market conditions.
Constant monitoring of news announcements (they can produce an adverse move that could hit your stop loss level.)
You can be whipsawed by intraday market moves.
Common strategies:
A wide variety of strategies can be used when daytrading including:
Trading based on chart patterns (double top, triangles, etc.)
Based on technical indicators (MA, RSI, etc.)
Based on price behavior
Breakout trading
Pullback traders
Swing Trading
Characteristics
Trades last from two to five days
Swing traders attempt to forecast the medium term trend
Positions are held overnight
Time required devoting to such strategy: Swing traders are only required to monitor their trades a couple times a day.
Charts to look at: 1 hour to 4 hour
Advantages:
High potential for returns
Swing traders can use a higher RR ratio than daytraders.
Since trades have a longer time span, they are not likely to be caught by “market noise”.
Low transaction costs
Emotional stress and psychological pressure is low in this type of trading
Disadvantages:
Not able to capitalize the short term trend
A high level of discipline and patience is required to trade this way.
This type of trading usually has low system accuracy.
Overnight risk
Common strategies:
A wide variety of strategies can be used when swing trading including:
Swing traders usually focus on currency pairs that pay interest.
Trading based on chart patterns (double top, triangles, etc.)
Based on technical indicators (MA, RSI, etc.)
Based on price behavior
Breakout trading
Pullback traders (from medium term trends)
Position Trading
Characteristics
Trades last from a couple days to several months
Position traders attempt to forecast the long term trend
Positions are held overnight
Time required devoting to such strategy: Position traders are only required to monitor their trades one or two times a day.
Charts to look at: 4 hour to daily charts
Advantages:
High potential for returns
Position traders can use a higher RR ratio than swing traders and daytraders. They usually use 5:1 or even higher.
Since trades have a longer time span, they are not likely to be caught by intraday market moves.
Low transaction costs
Emotional stress and psychological pressure is the lowest in this type of trading
Disadvantages:
Not able to capitalize the short term trend
A high level of discipline and patience is required to trade this way.
This type of trading usually has low system accuracy.
Overnight risk
Common strategies:
A wide variety of strategies can be used when position trading including:
Position traders usually focus on currency pairs that pay interest.
Fibonacci levels tend to be very accurate on longer time frames
Trading based on chart patterns (double top, triangles, etc.)
Based on technical indicators (MA, RSI, etc.)
Based on price behavior
Breakout trading
Pullback traders (from medium term trends
Which one to choose?
Every trader has different needs, resources, time and objectives. Therefore, the best type of trading is the one that best fits your needs.
For instance, if you have a day job then a swing or position strategy is possibly the way to go. If you however don’t have a day job and are able to watch your charts during the day then a daytrading or scalping strategy will better fits your needs.
In addition, if you like to trade based on fundamental analysis then a long-term style will better fit your needs as changes in supply and demand take more time to be reflected in price action.
Whatever you choose, make sure it fits your needs and you are totally comfortable trading such approach, otherwise you are going to have problems trying to follow your system.