Choose your Trading Type and Strategies
When we talk about different trading styles, we’re basically referring to how often you place a trade, and how long you keep those trades running. So your style of trading will be strongly affected by how much time you can commit and your attitude to risk.
For example, if you think you can spend several hours a day sitting in front of a computer studying charts and market trends, then you may find you’re suited to making a large number of short-term trades. But if you’re a very busy person and can only afford to spend around 30 minutes per day researching the markets, then you’ll probably be more comfortable placing just a few longer-term trades.
Your personality will also have a big influence over your trading style. If you enjoy trading for the excitement and the buzz, you’ll be more likely to enjoy short-term trading. If you’re calm and patient, you may prefer to sit back and monitor your trades over the long term.
With that in mind, there are four main trading styles to choose from:
Timeframe: Long term
Holding period: Weeks / months / years
Trading activity: Low
Timeframe: Medium term
Holding period: Days to weeks
Trading activity: Medium
Timeframe: Short term
Holding period: Intraday
Trading activity: High
Timeframe: Very short term
Holding period: Seconds to minutes
Trading activity: Very high
Position trading & Swing trading
Position trading involves holding positions for weeks, months or even years with the expectation they will become profitable in the long term.
Investing is the most recognised and traditional form of position trading, with a great many people holding long-term investments in share portfolios, funds or pension plans. However, ‘investing’ exclusively refers to going long, while position trading can include going short as well.
Before entering a trade, a position trader will often spend a considerable amount of time studying the fundamentals of the asset they’re going to be trading.
For example, when buying shares, you’d usually look at the company’s financial reports, and in particular the financial statements, to see if it’s making profit or has an edge over its competition. Similarly, if you were position trading on forex, you’d probably examine the economic health and monetary policies of the relevant countries before placing a long-term currency trade.
Because of the long-term nature of these transactions, position traders tend to risk a lot more per trade than other types of trader – though with the expectation of making greater profits. Which means to be successful you need to have patience, and not get spooked by short-term market moves.
If you decide to follow a position-trading approach, there are a few things you need to be mentally prepared for.
When holding a trade for a long time, it’s almost inevitable that the market will move in an unfavourable direction at some point. In these circumstances you need to have the resolve and conviction to follow the rules set out in your trading plan, waiting for the market to turn back in your favour if required.
But imagine if you were then to read comments in the press suggesting the market could move even further against you? Would you be able to hold your nerve?
What’s more, if trading using leverage, you need to make sure you have enough starting capital to weather any large unfavourable price swings. As trades are made over such a long timeframe, the market could easily trend against you for several days or weeks, even if it does end up reversing eventually. These moves could force you to close your position early if you don’t have enough capital in reserve.
Swing trading involves holding positions over several days or weeks, in an attempt to take advantage of medium-term market moves. It’s the ideal style for people who want to trade fairly frequently but don’t have time to spend all day monitoring the markets.
In fact, it’s entirely possible to have a full-time job while swing trading in the evenings or early mornings, although you must be careful to set stops and limits for each trade.
Swing traders will regularly hold positions overnight, where large movements and market ‘gaps’ can occur. Due to the length of time trades are held for, the market will often move in an unfavourable direction at some point, therefore a certain amount of patience and nerve is required – though not as much as for position trading since the timeframe per trade is shorter.
Both fundamental and technical analysis (the study of market movements using charts) are commonly used for swing trading, with technical analysis particularly useful for establishing stop and limit levels.
Did you know?
Market gaps occur when the price of an asset makes a sharp jump from one level to another without any trading in between. These tend to occur between trading sessions, for example if the closing price of an asset one day is significantly higher or lower than its opening price the next.
Market gaps can be caused by earnings results, geopolitical events, regular buying/selling pressure or any major news announcement with the power to move the markets. They often occur in the equity and commodity markets, but are rarer in forex since it is highly liquid and trades 24 hours a day.
Day trading & Scalping
This type of trading involves opening and closing a small number of trades in the same day.
Positions are not held overnight, eliminating the exposure to large overnight moves when it could be difficult or impossible to get out of the trade – eg if you’re in bed, or the underlying market is closed. Instead, day traders generally prefer to monitor the markets throughout the trading day waiting for the ideal conditions to enter, and then exit, their positions.
This means day trading tends to be a very time-intensive activity, often requiring traders to check market prices, news and data regularly looking for entry opportunities and exit strategies. So, if you’re a very busy person or have a full-time job, you’ll need to consider whether you can devote enough time to monitoring and analysing the markets to be successful using this approach.
Day traders tend to rely on technical analysis more than fundamental analysis, as emerging chart patterns and indicators can often provide strong short-term signals to trade. However, if you decide to trade using this style, it’s still very important to know which major economic events are coming up each day, as these frequently cause market volatility and significant shifts in sentiment and momentum.
Scalping is the shortest-term style of trading and involves placing dozens, sometimes hundreds, of trades per day. Each trade is usually held from between just a few seconds, to a few minutes at the most.
The principle behind scalping is to open a trade and then exit it as soon as the market moves a certain small amount in your favour – so making a slight profit on each trade. If the market moves against you at any time, you close the trade and take a small loss.
The idea is to pick a market trending in a particular direction so you end up winning more trades than you lose. If the trend changes direction, you change the direction of your trades as well.
Scalping is an extremely intense form of trading requiring high levels of concentration over an extended period of time. It is essentially just a faster-paced version of day trading and, of course, you don’t hold any positions overnight. This means your risk per trade is by far the smallest of any of the styles, though the potential rewards are lower too.
The best time to trade is generally when the market is trending strongly up or down and there’s a lot of liquidity. This enables you to place trades in the direction of the trend then get out of them quickly as soon as the market moves.
When scalping you need to be particularly disciplined and not get distracted by chasing large profits or letting losses run. No one trade will be especially profitable, so you need to place a huge number of trades if you want to make significant gains.
For this reason, scalping is the most time-intensive style with traders often entering and exiting positions for several hours at a time, every day.
Due to the very short-term nature of the trades, scalpers tend to use technical chart analysis almost exclusively to identify trending markets. However, you still need to be aware of which economic announcements are scheduled for that day, as any surprising data could cause markets to gap, or trends to reverse.
After choosing a style it’s generally considered sensible to stick with it for at least a few weeks to determine whether it’s right for you. Continually changing your style whenever you have a losing streak means you can’t adapt and improve your trading plan effectively and can also lead to a loss of discipline.
Remember that all traders will endure a painful losing streak at some point. What separates successful traders from those that get wiped out quickly, is how they prepare for that inevitable streak, and how they react after it.