Types of Forex trading

Types of Forex trading

Different types of Forex traders

The world of financial markets can be approached in many different ways. While the end goal is to make money, the way to get there is different based on the personality of every trader. Some are focused on taking risks while expecting bigger rewards while others look to preserve their capital while building long-term and low-risk profits. There are 6 different types of traders that are familiar to the trading community.

 

Scalper

 

For those who like to take advantage of the speed and thrill of the financial markets, becoming a scalper is a good choice. Scalpers are very short-term traders (Figure 1), sometimes holding positions for seconds and looking to capitalize on the short-term volatility that happens across the markets. They look for highly liquid instruments so that they can get the price they deem attractive and sometimes using big or leveraged positions.

 

Scalpers need to be quick in their decision-making. They are also instinctive and are able to multi-task which helps them spot patterns and strategy elements over a very short period of time. Scalpers may endure some pain when the market is too volatile or unclear and could see large losses that would eliminate gains achieved over several days. Nonetheless, the reward to this style of trading means achieving big profits day after day.

Figure 1 – 1-minute EURUSD chart

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Day Trader

 

Day Traders are similar to scalpers but trade less in frequency and will look to hold trades for a longer period of time during the day. Such short-term traders may look at a 5-minute or 15-minute chart to make decisions and will end up closing all trades before the end of the day.

 

Again, similar to Scalpers, Day Traders need to be fast when making decisions despite having more leeway in deciding on a trade once the setup or pattern is valid and good to go. They do have to check quite often and will need to be in front of the screen most of the time but they are able to do other things while the trade manifests itself towards its potential goal.

 

Swing Trader

Swing Traders are known as medium-term trades and tend to trade specific setups that can last for days and even weeks before closing positions. Swing Traders will put great emphasis on technical analysis but are more mindful of current fundamentals and major news than Day Traders and Scalpers.

 

Figure 2 – 4-hour GBPCHF chart

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Swing Traders are laid back in nature since they do not need to be glued to the screen throughout all trading sessions and can place trades and check on them once a day. They still need to analyze the markets properly and are usually biased towards high probability setups that their systems generate given the added risk of using bigger timeframes when trading. Swing Traders will often use 1-hour and 4-hour charts (Figure 2) to trade and may look at even bigger timeframes for direction and sometimes, smaller ones for a more specific entry point.

Position Trader

 

Position Traders are the most long-term of the bunch, holding trades for weeks, months, and even years at times. They have no interest in the short-term price action of an instrument and will only look at smaller timeframes to pinpoint entry and exit points. Position Traders focus on fundamental analysis and will look at economic trends, central bank decisions, and interest rates among other factors that help determine the long-term direction of a specific product.

 

Position Traders tend to use technical analysis only for entry and exit reasons and will not place extra emphasis on it given their long-term perspective. They check the market once a week or depending on the volatility of a specific product as well as its current proximity to the trader’s stop loss or target.

 

Figure 3 – 5-min Dow Jones chart around an economic release

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Algorithmic Trader

Those who enjoy coding and programming and are good with computers, they can use their skills to build automated and occasionally, high-frequency trading systems that are autonomous and trade on their own. Algo Traders often rely on technical analysis and will create a set of rules that they believe will bring consistent returns. After the initial setup, traders will work on testing the system on historical data to see how well it performed in the past.

 

Once testing is complete, the system is applied on a trading account and usually with smaller accounts and smaller trade sizes as the trader gets comfortable with the automated system. Such programs are often installed on secure and highly reliable servers that are not interrupted by occasional internet or electrical issues.

 

Algo trading dominates the market nowadays and helps the trader eliminate emotions when it comes to trading. Aside from its psychological advantages, Algo trading means traders don’t have to check often and will only do so to make sure the system is functional.

Event-driven Trader

Some traders prefer to enter the market during times of high volatility such as around economic releases (Figure 3) or major events. Such traders will look at the economic calendar and will attempt to enter the market once the release has taken place, often with generous gains if they are on the right side of the market.

While the advantage in this type of trading is the possibility of quick gains and minimal time in front of the screen, the disadvantage is having to keep an eye on liquidity around news releases as most traders are on the sidelines. In other words, if you are looking to enter the market as soon as a release comes out, be ready for prices to vary wildly given the low participation during this short period of time.

Which style is suitable for you?

If you need help in developing your trading style, start by deciding how much time you can dedicate to trading on a daily basis. If you feel like you can put in a few hours a day, then maybe short-term trading would be good for you. In the event you find it to be stressful then maybe a medium-term approach is better.

 

On the other hand, if you feel like you have little time to dedicate to trading, then maybe you should consider position trading or an algo that trades on its own.

 

If you like to keep up with news and its effect, news trading could be the way to go while being mindful of some of the disadvantages associated.

 

Some traders went from being short-term to long-term trades given responsibilities in life that only increase with time. Others have retired from their primary careers and will take advantage of this newly available free time to trade short-term after being long-term traders for a while.

 

In the end, whatever you decide or whatever you find suitable to your character, remember to keep in mind that trading is a business and should be treated as such. Whether its short term or long-term, it’s important to minimize risk and maximize reward while keeping an eye on news and other factors that could affect the performance of your strategy.

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