Trading Forex without a strategy is like driving a car with your eyes closed. While you may get lucky for a while, it will end disastrously. There are many trading strategies, which can be categorized under four trading styles. The main difference is the intended length of the typical trade’s lifespan.
Traders must find the trading style that suits them most and then choose or develop a trading strategy to fit it. Trader must also learn to execute and trust it, which takes research, back testing, and forward testing.
What are the four trading styles?
Scalping for ultra-short-term traders (from a few seconds to minutes)
Day Trading for short-term traders (intraday trading)
Swing Trading for short-to-medium traders (from a day or two to a couple of weeks)
Position Trading for long-term traders (from a couple of weeks to months)
What is the Best Trading Style for Beginners?
There is no one best trading style for everyone, as it all comes down to the individual trader finding a strategy that best suits them. Beginner traders should evaluate each trading style, then select one they like, and then find a trading strategy for beginners in that style to test. It is certainly true that there are some trading strategies that just are not profitable, so do not make the mistake that all strategies are equally valid.
The only trading strategies that are both profitable over the long term and which have simple non-discretionary rules, are trend trading strategies in major Forex currency pairs such as the EUR/USD and USD/JPY. Many Forex brokers and websites publish trading strategy rules based on applying indicators to short time frame price charts on any currency pair or cross. These strategies do not work and anyone following them is bound to lose money.
Regarding discretionary trading strategies, learning to identify reliable support and resistance levels, and then using them to trade based upon what the market is doing on higher time frames, can also work well in Forex.
Returning to the topic of trading styles, it will take time, trial and error, and losses along the way to find the best style for you, but the benefits will yield positive long-term results. You may find that your personal circumstances dictate your possible trading styles. For example, if you have an extremely busy schedule, you may just not have the time to implement a very short-term trading style, unless you are willing and able to use automated trading.
What is the difference between a trading style and a trading strategy?
A trading style defines the trade duration and mentality of the trader, and four distinct trading styles exist. Each trading style can be expressed in countless trading strategies. They follow the rules of the trading style but use different variables to identify when to enter new trades and exit them.
What are the trading costs associated with trading strategies?
Each trading style comes with associated trading costs, and traders must understand them before deciding which one to use.
Here is an overview of which trading costs apply to each of the four primary trading styles:
Scalping – Spreads
Day Trading – Spreads
Swing Trading – Spreads and swap rates on leveraged overnight positions
Position Trading – Spreads and swap rates on leveraged overnight positions
Why should traders remain committed to their trading strategy?
Frequently changing a trading strategy after facing a series of losses tends to result in making the situation even worse. This is because in financial markets, statistically, the “darkest hour is just before dawn”, so you will often break and switch to another strategy just as your original strategy starts to win. This can be extremely harmful to your trading psychology.
This is one reason why it is so important to be very sure that your trading strategy “works” before you start executing it, because your faith will be severely tested at some point. If you have back tested a trading strategy, you will also know how bad its worst losing streaks tend to be, so you will have an idea whether a strong of losses is natural or an indication that something has gone fundamentally wrong with your trading strategy.
How Many Trading Styles and Strategies Exist?
There are four trading styles, and each one has advantages and disadvantages. Traders should carefully consider them and select one that best fits their personality and life circumstances. If you are not sure, you can always try them all out on a demo account.
Scalping – An ideal trading style for algorithmic traders:
Scalping is a trading style where traders place high-volume, short-duration trades, holding positions for only a few seconds or minutes. Rather than profiting from the trend, they capture a few pips and my even trade the same asset both long and short during the same trading session.
Advantages of Scalping:
No exposure to market fluctuations.
No swap rates amid the absence of overnight positions.
High-volume short-duration trades.
Volume-based rebate programs lower trading costs.
Focused on fewer assets but highly liquid ones.
Purely technical trading.
Disadvantages of Scalping:
Time-sensitive and stressful.
Not suitable for part-time traders.
Requires algorithmic trading solutions for long-term profitability, which most retail traders cannot afford.
One loss can wipe out dozens of profitable trades.
Day Trading – Ideal for leveraged short-term traders:
Day trading is a low-cost style for leveraged traders, as traders never keep overnight positions. Moderate trading volume and short time frames usually result in multiple trades in the same asset to capture short-term fluctuations in price action. Day trading may be manual or algorithmic.
Advantages of Day Trading:
Limited exposure to market fluctuations.
No swap rates to be paid amid the absence of overnight positions.
Volume-based rebate programs lower trading costs.
Disadvantages of Day Trading:
Very high loss rates, extremely challenging and stressful.
Unsuitable for very busy traders or traders living in inconvenient time zones.
Swing Trading – A balanced approach for medium-term traders
Swing trading is best suited for traders who wish to trade in the direction of a well-established trend. They buy the dips or sell the rallies and usually prefer volatile assets. Trading costs can become a significant drag on profits, especially if leveraged positions remain open for several weeks.
Advantages of Swing Trading:
Less stressful trading style.
Suitable for part-time traders.
Ideal for manual trading without the need for expensive algorithmic trading solutions.
Disadvantages of Swing Trading:
Medium exposure to market fluctuations, including fundamental events.
Swap rates payable on leveraged overnight positions.
Potentially slower degree of profit generation.
Position Trading – An approach for unleveraged long-term traders
Position trading is like buy-and-hold investing, but traders will go both long and short, not just long. Position trading requires patience to wait for profits to accumulate, as positions can remain open for weeks or even months, making it most suitable for unleveraged or low leveraged trading. It is a low-frequency trading style, and position traders avoid volatility but favor established trends on long time frames.
Advantages of Position Trading:
Requires very limited time investment.
Statistically sound if trend-following strategy used.
Well-suited to manual traders.
Disadvantages of Position Trading:
High exposure to market fluctuations, including fundamental events.
Slow profit generation.
Very challenging to apply to Forex trading due to overnight swap costs and relatively slow pace of Forex trends.
What are the Different Day Trading Styles?
Day trading accounts for the bulk of trading activity in Forex. In day trading, traders can use leverage without paying financing fees and limit potential time exposure to unforeseen market events. Day trading generally relies primarily upon technical analysis, but effective day traders also pay close attention to market sentiment, high-impact news releases, and possibly even fundamentals, not to mention price action on higher time frames for guidance.
The most used trading styles by day traders:
High-frequency trading (HFT) requires cutting-edge technology, and retail traders generally cannot compete in this sector, which continues to gather traction among hedge funds and institutional traders. HFT consists of rapid order placement during milliseconds, capturing fractions of pips, and repeating the process several thousand times per trading session.
Trend trading is probably the best-known strategy, ideal for swing and position traders. Traders use technical analysis to identify trend and momentum and enter trades accordingly. Fundamental analysis can be used as a trade filter. They remain in the trade while the trend continues and therefore often give back considerable floating profit due to the use of trailing stop methods for exits. Ongoing technical analysis can identify retracements, which can be used to add to positions.
Range trading is a style that works best in markets which are trading sideways, where price action remains within well-established support and resistance levels. Scalpers often use this style, as it involves shorter timeframes and can offer very clear trade entry points. The short-term oscillation between a range gives entry and exit signals, with traders buying an asset at support and selling at resistance.
Breakout trading attempts to capture the major thrust of a trend or a momentum change using technical analysis. A breakout occurs when the price moves above a well-established resistance level (or below a well-established support level). This method is statistically effective for very liquid assets such as major Forex currency pairs. It can be useful for both for swing traders and day traders. Breakout traders may enter upon a simple breakout or a retest of the breakout level following the breakout.
In its purest form, the is an attempt to enter a trade right at the beginning of a major trend. It involves buying low or selling high. Trades tend to have a high failure rate, but the few winners can be extremely profitable. A combination of fundamental vs technical analysis is usually used to try to pinpoint the beginning of a new directional move. The most significant challenge is distinguishing between a retracement, which will extend the trend, and a true reversal.
There are many different trading styles. The right trading style for you is the one that suits your personality, availability, and ability. Beginner traders often switch their trading styles after experiencing a losing streak, which is a critical error. No trading approach can deliver profits from every trade, but frequently changing strategies will likely only extend trading losses. Learning to trust a trading style and strategy requires time and active trading experience, but the long-term reward is great, so it is important to persevere. However, it is impossible to persevere under pressure if you do not trust both your trading style and trading strategy. Therefore, it is important to learn initially with a demo account and then with a small live account before building up to your fullest level of risk.
What are the different trading styles?
The four different trading styles are scalping, day trading, swing trading, and position trading.
How do I know my trading style?
Consider what your personality would best suit and begin trialing it and other trading styles to confirm which trading style is really yours. This may take a while as you need to experience all the pros and cons of each style directly.
What are the three types of trade?
The three primary types of trading consist of scalping, intraday trading, and swing trading.
What is the most profitable trading style?
The easiest profits can be made in longer-term trading styles, but a skillful trader may find they can make the greatest profits by undertaking shorter-term trading. For most traders, the most profitable trading style is the one that suits them most.