Most Forex traders will use one of the four trading styles: scalping, day trading, swing trading or position trading. In this article we will explain the main differences between each of these trading styles.
Scalping involves entering and exiting the market for short durations of time. Traders applying this style typically use shorter time frames such as the 1 minute and 5 minute time frames. Their goal is typically to make small continuous profits which will accumulate to much bigger sums. This trading style is suitable for traders who are comfortable with fast price movements and can focus on price charts for long hours.
Advantages of Scalping
– Quick wins from small profits that add up.
Disadvantages of Scalping
– Huge losses in cases of sudden price movements.
Day trading is where traders buy and sell currencies and close their trades within the day. Traders typically do not hold their positions overnight. This is one of the most popular trading styles. Day trading is also a short-term trading style and traders can use the minute and hourly time frames. This trading style is suitable for traders who have time to analyse and execute trades.
Advantages of Day Trading:
– Plenty of trading opportunities to exploit. – Traders are able to know whether they have made profits or losses on a particular day.
Disadvantages of Day Trading:
– Transaction costs are high because there are more trade opportunities.
– It may be stressful if you don’t have enough free time to monitor the market.
Swing trading is a long-term trading style where trades are held for a few days to several weeks. It involves identifying swing highs and swing lows before entering the market. Longer time frames are used in this style. A swing high is a point (peak) reached before a price decline. Traders at this point look to sell. A swing low, on the other hand, is a point (trough) reached before a rise in price. Traders here look to buy. This type of trading is suitable for traders who don’t have enough time to monitor their trades such as those who have other jobs. It is also suitable if a trader is patient and doesn’t mind taking a few trades.
Advantages of Swing Trading:
– It saves on time for traders who are busy in other activities.
Disadvantages of Swing Trading:
– Traders may be subject to overnight risk.
This is a trading style where trades may last for weeks, months or even years. This trading style involves using daily, weekly, and monthly time frames. It also involves fewer trades than the other trading styles. Additionally, the stop losses needed are huge and traders need to have sufficient capital. This style is suitable for traders who are extremely patient and who can stay in control even when the market moves against their trading positions.
Advantages of Position Trading:
– Transaction costs are low. – It takes less time as there is less monitoring involved.
Disadvantages of Position Trading: – It requires setting up large stop losses.
– It needs a lot of capital.
Different traders use different trading styles. It is up to the you to decide which trading styles work best for you. Before selecting a trading style, it is imperative for you to determine the amount of capital you are willing to invest. This is because long time frames require large amounts of capital while small time frames do not require a lot of capital.