The Different Types of Trading Styles

The Different Types of Trading Styles

There are as many ways to make trading decisions as there are traders.

However, there are fewer types of trading and they can be categorized in to different styles.

This article will define and explain them.

You will also learn about the pros and cons of each of the types of trading to better understand how you can approach the markets.

By the time you finish reading this, you will have a better idea about what types of trading you would most likely be best suited to. So you can start developing a trading strategy around it.

Lets start with an overview.

Overview of the different types of trading 

Types of trading overview

The different types of trading styles

Below is a list of the main types of trading and trading styles.

Some of these types of trading will be agnostic to your trading strategy. Others will require a unique strategy that is not so interchangeable from one type of trading to the next.

Scalping

Scalping the market usually involves high frequency trading.

The objective is to trade very actively to make small and very frequent profits.

Traders that use this trading style are looking to take advantage of the smallest price fluctuations in the market.  A trader or a trading robot could make hundreds of trades per day.

Scalpers and high frequency trading robots typically have tight stop losses and very small profit targets. The risks to reward ratios are typically under 20 pips.

This is your rapid fire style of trading and the duration of trades can range from seconds to maybe up to an hour. It depends on the technology used and market conditions.

This type of trading is nearly all technical based and trading is usually done on sub 15 minute charts.

Latency and price slippage can critically affect this type of trading style. Any delays in execution can result in a significantly worse price. Which can mean the difference between a profit and a loss.

Scalping is also the most sensitive to changes in liquidity and widening spreads of all the trading styles mentioned here.

Pros

  • High number of trading signals and opportunities to trade
  • Low time in market can potentially reduce risk
  • Potential to make money very frequently
  • Higher probability of reaching profit targets because they are close by

Cons

  • High number of false trading signals
  • Price movements may seem more random
  • Higher probability of price reaching the stop loss if it is close by
  • Transaction costs are a higher percentage of profits and high in general
  • Sensitive to latency, slippage, widening spreads and platform instabilities
  • More screen time is required to trade and monitor and manage the trades

Day trading

A day trade is defined as all types of trading that involve buying and selling currencies within the same day. Scalping could be classified as day trading too.

The objective of this type of trading is to make frequent short term trades to benefit from intra-day price momentum.  All deals are closed before the end of the day to minimize the risks of carrying them overnight.

This type of trading style mostly has a technical approach. However, trading decisions can also be made using economic or political news announcements as a catalyst.  Most day traders are technical traders.

There are usually several intra-day price trends that day traders try to benefit from. These relate to the intra-day price trends that may unfold between each Forex trading session.

Day traders can use all intra-day time frames to help them identify trading opportunities. Deals are usually held for times that range from minutes to hours.

Price objectives could be anything from 20 pips to the average daily price range for the currency pair.

Pros

  • Trading signals and opportunities to trade exist daily
  • Low time in market can potentially reduce risk
  • Potential to make money daily
  • Higher probability of reaching profit targets if placed close by

Cons

  • High number of false trading signals
  • Higher probability of price reaching the stop loss if it is close by
  • Intra-day price movements may see random and hard to read
  • Some sensitivity to latency, slippage, widening spreads and platform instabilities
  • More screen time required to monitor trades and actively manage them

Swing trading

Swing trading is a type of trading that requires you to hold on to deals for a more prolonged period of time. Unlike day trading, positions are usually carried over night to capture larger price swings.

As there are intra-day price trends, there are also intra-week or intra-month price trends.

This trading style requires more patience than the previous two types of trading. A swing trader must be disciplined enough to wait for the trading opportunities to present themselves. Once a deal has been executed, a swing trader must also hold tight and allow the price trend to unfold.

Swing trading requires a little more foresight than day trading too. This is because you have to anticipate larger price trends.

The typical holding time for a swing trade could last from days to weeks. It all depends on what is happening in the markets. However, there are usually about two to three good opportunities per week, per currency pair with this type of trading.

Price targets and stop losses are generally placed at further distances than day trading. This is to account for the larger waves the price makes on the higher time frames.

A typical stop loss for a swing trade could be 50 to 100 pips wide. And profit targets could be the same and several multiples more.

This type of trading style involves analyzing the market on the higher time frames. For example, the daily time frame could be used to determine the dominant price trend. Then the one hour or four hour time frames could be used to fine tune an entry or exit.

People who are in full time employment or prefer to follow the markets less frequently are naturally drawn to lower frequency types of trading. Apart from the potential of capturing larger price trends, less monitoring and trade management is required.

Being less active can potentially contribute to better results in Forex trading. Since more activity does not necessarily mean more profits. There is such a thing as over trading.

Pros

  • Trading signals and opportunities are more significant on higher time frames
  • Potentially capture larger price trends
  • Deals can potentially earn interest from the overnight swap
  • Less screen time is required to monitor and manage trades
  • Wider stop losses might reduce the probability of getting stopped out
  • Transaction fees can be a lower percentage of profits and lower in general

Cons

  • Fewer trading signals per week reduces the potential to make profits frequently
  • More time might be required to recover from losing trades
  • More time required to allow trade ideas to unfold
  • It’s possible to have a negative cost of carry from the overnight swap
  • Must be disciplined enough to sit through price corrections against your position
  • Wider stop losses are usually required, which could mean smaller deal sizes

Position trading

Position trading is very similar to swing trading.

The terms for these two styles of trading can be used interchangeably to mean the same thing.

The only difference is that a position trader sizes up the broader market trend and can hold deals for a longer period of time.

A position trader could hold deals for months or even years and this type of trading might even be considered similar to investing.

Position traders pay less attention to short term price trends. More attention is placed on weekly, monthly or yearly trends and decisions are based more on fundamental drivers. They will pay particular attention to seasonality in markets, the health of a country's economy and interest rates.

Since deals are being held for longer periods of time, position traders prefer to benefit from the swap to earn interest. So they factor in buying the higher yielding currencies and selling the low yielding ones when making decisions.

Pros

  • Trading opportunities are rarer but potentially longer lasting
  • Trading signals are more significant
  • Potential to capture significant price trends
  • Deals can potentially earn interest from the overnight swap
  • Less screen time is required to actively monitor and manage trades
  • Transaction fees are relatively insignificant relative to potential profits and in general

Cons

  • Few good trading opportunities per year
  • More time might be required to recover from losing trades
  • More time is required to allow trade ideas to unfold
  • It’s possible to have a negative cost of carry from the overnight swap
  • Must be extremely patient
  • Much wider stop losses are required, which could mean smaller deal sizes

Types of trading strategies for each style

Trend following

To make money trading, you must buy at one price and sell at a better price. For this to happen, the price must trend in the direction of your trade. Even if it is a few pips.

All the types of trading mentioned so far are trend following in nature. Whether the trading style is short or longer term, smaller price trends exist within larger ones.

The objective of trend following is to determine the direction of the dominant trend. Then look to get in at the best possible price to ride it as far as it could possible go.

Trend following is a type of trading strategy that can complement all types of trading. Even scalping can turn in to a day or swing trade if the conditions are right and a trend starts developing.

Trend following requires you to look at the bigger picture. Then determine where the current price is in relation to it.

Mean reversion

The underlying principle of mean reversion strategies states that prices will eventually revert back to a mean or average price.

This is a type of trading that could involve taking counter trend trades.

Market conditions create supply and demand that pushes asset prices in one direction or the other. When the price has moved far enough, you can expect some kind of correction to occur. This will depend on the perceptions of the market’s participants and whether they believe asset prices are cheap or expensive.

The objective of a mean reversion style of trading is to try to determine what the mean price or fair value is. Then trade back towards it when prices have moved too far in one direction or the other.

What style or types of trading suit you?

There are a lot of contradictions in trading.

You could be looking at a short term time frame and observe that the price trend is down. However, on a medium to longer term time frame, you could observe that the price trend is up.

Further to this, you could be patiently waiting for the short term price trend to top or bottom before entering in the direction of the medium to long term trend. Only to find out that the short term corrective trend was the start of a deeper correction or reversal of the longer term trend.

One of the challenges in trading is determining the trend and whether it will continue or reverse its direction.

Even though you might have a preferred trading time frame and style of trading, you should remain fluid in your approach. Sometimes, market conditions are better suited to shorter term types of trading.

At other times, it would be more beneficial to hold your deals for longer.  Then again, sometimes it’s best to do nothing.

Confining yourself to any one particular style of trading can restrict your ability to make decisions. Whether that is to limit risk or maximize your potential to profit, you should be dynamic in your approach.

All types of trading should limit losses and maximize the potential to profit

Cut your losing trades early and let your winning trades run.

Market conditions and trends can change rapidly. Your ability to adapt to them and recognize changes early will help you survive in the market place. Having the courage of your convictions and identifying the most probable price levels to enter and exit will help you to thrive.

Ultimately, you will gravitate to some types of trading over others. However, you should carefully consider what your trading objectives are. Everyone wants to make money from the markets but there are various ways to do it. Not all types of trading will be suitable for you.

You might not have much time to analyse and monitor the markets. You may be impatient and prefer quick feedback on your trade ideas. You might like lots of action or prefer a more composed and considered approach to your trading.

Let your personality, tolerance to risk and strengths guide you towards choosing the most suitable types of trading for you.

You can potentially be just as successful trading with any of these styles as long as it is the right style for you.

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