Once you leave the safety of the Demo account and join the ranks of real traders, your trading style will determine the way you trade. With time, as you finesse the art of trading, you may be able to develop your own trading style. You will also come to realise that your personal trading style will fall under one of the two major categories, or a mix of both.
Investing VS Trading
There are a few major factors that set investing and trading apart.
Usually, when we think of investing we think first and foremost long-term, focusing our attention on growth. Investing may last months and sometimes years, hence, it is a more passive approach to generating income. Trading, on the other hand, is more active, has a much shorter holding period, and you may already see results of your trading decisions within seconds or a few days. Investors use fundamental analysis and tend to study company reports and news releases, based on which they plan their actions. Traders favour technical analysis and rely on charts to forecast price movements. Trading requires a hands-on approach with regular monitoring and opening/ closing positions. As long as you implement a profitable trading strategy, investing and trading are both equally worthy of your time and effort.
While, of course, merging and utilising both styles happens quite often, it’s hardly ever a 50/50 combination, and the preferred approach will always prevail.
Forex Trading Styles
Forex is a great example to illustrate what styles Trading incorporates, but this doesn’t mean that the following techniques only apply to trading currencies. Trading gives you opportunities to speculate on currency pairs, cryptocurrencies, energies, commodities, precious metals, indices and stocks. The choice is truly incredible. However, Forex, being very sensitive to political and economic news, is a preferred trading asset of many intraday traders.
Intraday and Multi Day Trading
Upon uncovering the subject of various trading styles, you’ll come to realise that there are different ways to trade Forex, each designed to serve a specific purpose.
As in the case of Investing and Trading, the difference between Intraday and Multi Day trading styles lies within holding periods, risk tolerance and speed.
Intraday trading is most often referred to as Day trading. As the name suggests, Day trading defines the time frame during which the trading activity is performed. Day traders don’t leave their positions open overnight, unlike Multi Day traders who need to be mindful of the potential risks during market close hours. It is important to note that international markets operate in their local time zones, regardless of your physical location. Let’s say, you’re based in Sydney and it’s 10pm on a Friday night, hours after the Australian stock exchange closed. You can start a new trading session in the US market, where the day has just begun.
Day Trading Styles
Scalping is a day trading style, the main focus of which is to open and close large size positions within a short time period to capture small price moves. Although scalping requires a lot more time, discipline and accuracy, small but frequent wins can contribute to cumulative profits. A good way to ensure the positive outcome is to only place high-probability orders and cap holding times, ranging from seconds to minutes. This rule applies to both winning AND losing exits too, as only quick and decisive withdrawals will help you stay afloat.
Scalping is best for: stress-resistant active day traders with high focus and discipline levels. Somewhat cool-headed, they can make quick and critical decisions to take profits and losses. Scalpers minimize their risks by avoiding holding positions for an extended period of time.
Scalping tools: the basic tools that scalpers require include a direct access (ECN) online broker, smaller time frame charts (up to 15 minutes), Level 2 market data and hot keys for speed commands.
Momentum trading focuses on following and buying into the existing direction of the trend and exiting before the direction changes. In other words, you buy high and sell higher. Short sell low and buy lower. Momentum traders watch their newsfeed closely and search for the most active stocks to trade.
Momentum Trading is best for: risk-tolerant active day traders, who already have previous experience trading, with a good grasp of trading charts, signals and indicators. Entries and exits are riskier with Momentum Trading, hence having solid command of precision timing and implementing Stop-Loss is critical.
Momentum Trading tools: as with Scalping, Momentum traders do best with a direct access (ECN) online broker, smaller time frame charts (1-minute, 5-minutes, 15 minutes), Level 2 market data and hot keys for speed commands.
Multi Day Trading Styles
For the pattern to work and produce results, Swing traders need to hold their positions overnight, quite often over multiple days and even weeks. In order to implement this style, Swing Trading requires the use of technical analysis on longer time frames (ex. 60 minutes and daily charts). Due to the overnight risk exposure, the reduction in the share size allocation should be taken into consideration.
Swing Trading is best for: less active, but more patient traders with the focus on the long-term goal.
Swing Trading tools: Swing traders benefit most from a combination of fundamental analysis and technical analysis on short-term and medium-term perspectives. This range may vary from 60 minutes to daily and/or weekly charts, depending on the goal at hand. Swing traders, more often than not, prefer to trade on a high-end platform that delivers various reports for analysis, a live newsfeed and companies’ quarterly and annual reports. Other basic tools also include a direct access (ECN) online broker, Level 2 market data and hot keys for speed commands.
Position Trading also favours longer holding periods, but unlike Swing Trading, these holding periods may stretch out to weeks or years. Similar to investors, Position traders focus heavily on fundamental analysis, mixed with some basic technical analysis to read and understand trends and price movement. The portfolio of Position traders is usually very diverse with the smallest share size allocation.
Position Trading is best for: passive traders who ignore the short-term market “noise” and focus on the long-term perspective. Position traders pay a lot of attention to company filings and reports in order to identify the potential impact on the company’s future growth.
Position Trading tools: due to a more passive, but research-heavy nature of this trading style, Position traders will enjoy working with a platform that delivers all the necessary and most relevant charts and data. Position traders drive results and make forecasts based on daily, weekly and monthly time frames. To keep their focus only on what’s important to them, Position traders often set news and price alerts.
Trader Aptitude Test
If you’re just starting off as a trader or an investor, and you’re not sure yet what direction to take, check out the following trader aptitude tests to find your trading style.
Tharp Trader Test – based on research of over 5,000 traders.
Day Trader Test – includes Trader Personality Test, Trader Motivators Test, Technical Analysis Test and more.
Trading Quiz – Stock & Option Trader’s Psychometric Test.
Day Trading Styles: Summary
Trading has matured greatly since the beginning, and keeps on evolving. In general terms, there are two major approaches to trading – Investing and Trading – each can be further broken down into Intraday and Multi Day trading styles. While choosing a preferred style may not present much trouble, gaining both practical and theoretical knowledge shouldn’t be taken lightly. However, if you are new to trading, you can take one of the available Trader Aptitude Tests that will help you get started.