Trading Style – Which Works Best For You?
With more experience and time you’ll eventually develop a trading style that best works for you.
Your trading style is likely to depend on several factors; tolerance to risk, the time frame of your investment, the amount of time you have available to monitor the markets and your personality. All of these factors are discussed and explained in detail on the 2 Day Forex and Stock Market Training Masterclass
Below is a list of trading styles that could help you along your journey to discovering a successful trading strategy which is better tailored to your requirements.
Position trading has the longest trading time frame; trades generally span a period of months to years. Position traders use a combination of technical and fundamental analysis to make trading decisions.
Weekly and monthly price charts are examined when evaluating the markets. Short-term fluctuations are considered as noise and ignored. Instead, the position trader aims to profit from long-term trends.
This style of trading is similar to investing in that the trader invests his/her time in doing technical and fundamental analysis. This is more of a buy and hold trader.
Position traders tend to do more research before placing their trades, they are less active traders, they have a longer investment time frame with the aim of realizing long-term profits,
Swing trading is a style of trading where positions are held for a period of days or weeks.
Swing traders aim to profit from short-term market moves. Swing traders usually rely on technical analysis and price action to determine profitable entry and exit points. They tend to focus less on the fundamentals.
Trades are executed when a previously established profit target is reached, when the trade is stopped out (moves a certain amount in the wrong direction) or after a set amount of time has elapsed.
Swing trading doesn’t require constant monitoring because trades are placed over a period of days to weeks (with an average of one to four days). Swing trading is popular amongst traders who are unable to monitor their positions throughout each trading session.
Day trading is when trades are held for a period of minutes to hours. These traders are known as rapid-fire traders, they actively enter and exit trading position on the same trading day.
Day traders don’t hold any positions overnight, all trades are closed by the end of the trading session using a profit target, stop loss or time exit (such as an end-of-day exit).
Day traders use technical analysis to find and exploit intraday price fluctuations, viewing intraday price charts with minute, tick and/or volume based charting intervals.
Day traders rely on frequent small gains to build profits. Moreover, day traders leverage their trading using margins.
Day trading requires a complete dedication-it is a full-time job since positions have to be constantly monitored and traders need to be immediately aware of any interruptions to the technology chain (for example, a lost Internet connection or a trading platform issue).
Scalp trading is another active form of day trading which involves frequent buying and selling throughout the trading session. Scalp traders rely on frequency and very small gains to make a profit.
Scalp traders typically target the smallest intraday price movements. Predetermined profit and loss price levels are used to manage positions which are generally held for a period of seconds to minutes.
Because gains are small on any one trade, scalpers may place dozens or even hundreds of trades each trading session; as a result, it’s imperative that scalpers have access to low trading commissions.
It should be noted that scalp trading is considered very risky because it relies on having a high percentage of winning trades. And because the average winning trade is generally many times smaller than the average losing trade, it can take just one or two losing trades to wipe out all of your profits.
Precision, total dedication, and strong nerves are required for this style of trading.
This type of trading style is not suitable for independent home traders.
High-frequency trading (HFT) is the ultra rapid fire traders of the market.
You’ll need expensive hardware and software (algorithms) to trade the markets at such a high frequency. These traders use complex (and typically proprietary) algorithms to analyze multiple markets and execute orders based on market conditions.
Traders who have the fastest execution speeds are the most profitable.
The book Flash Boys: A Wall Street Revolt, written by Michael Lewis, focused on the rise of HFT in the US equities market. Flash Boys highlighted high-frequency traders’ main requirement, speed.
In fact, speed was so important for HFTs that $300 million was invested in a cable project to connect the financial markets of Chicago and New York that would shave 4 milliseconds off a trade.
But Today, just three years after Lewis’s 2014 book, many HFT firms are struggling to make a profit or have closed shop. Why? Lack of volatility, stiffer competition, and new trading rules – including the NYSE’s “speed bump” designed to slow down HFT have all been cited as the main reason.