Or better still, ‘What trading style suits you?’
In this article, we’ll look at common trading styles as well as approaches to the markets that will help guide you in choosing your own trading style. Remember, every trader is unique and as you skill up on your trading journey, you’ll begin to develop your own nuances within the disciplines we cover below.
The first category or style of trader we’ll look at is the Scalper. Scalpers get their name because they scalp – or scrape off – a few ticks from the market as frequently as they can. Scalpers are short-term traders who are less interested in long-term trends as they are in short-term price action and the ranges and changes therein. Scalpers are typically agnostic about the market’s direction and they’re just as happy trading long positions as they are or short. Scalping is the original form of high frequency trading; these traders will open and close positions very quickly, perhaps within a few seconds, harvesting a few ticks on as many trades as they can.
The Scalper is also adept at cutting losing or non-performing trades. Scratching unsuccessful trades for little or no loss is the key to a profitable scalping strategy. Good scalpers can make money even if they have more scratched than winning trades, as long as the cumulative losses and costs on their non-performing trades don’t outweigh the accumulated profits seen on their winners.
Historically, scalping was a demanding style that required traders to spend long hours on the desk, eyes glued intently to the screen for as long as they could concentrate. While it is still the most difficult trading style, technology and the use of dedicated software, such as EAs or expert advisors, have certainly eased the manual burden. However, despite the advances in robots and automation, scalping traders need to be at the top of their game as they look for the end of – or commencement of – the short-term trading ranges that are their bread and butter.
Unlike Scalpers, Swing traders take a more measured view of the markets and their price action, being particularly interested in market direction and overall trends. Swing traders aim to identify trends, or swings, in market sentiment as they emerge or are confirmed. They join that trend and run their positions for as long as possible, hoping to capture as many ticks as they can during the lifetime of the trade. Swing traders use stop losses to protect themselves from the effects of false breakouts but will often trail these stops behind open positions to secure profits. When a trader moves a stop-loss order beyond an entry point, they lock in a profit on that trade, even though there is always the possibility of slippage to consider as and when the stop loss order is triggered. Swing traders can trade intraday moves or they can choose to keep positions open overnight, though it would common for them to scale back their exposure if they do so, to reduce their overnight risk. Swing traders make far fewer trades than the scalpers, but they have hope for a more significant profit on each one.
When Swing traders spot an emerging trend, they look for confirmation from their chosen indicators before they jump in. That confirmation can take the form of price cascades, such as a series of new one minute highs or lows, or price progressions, where we might see successive new one, five- and fifteen-minute highs or lows. Momentum indicators, such as MACD and Stochastics, are also favourite confirmation tools among swing traders. Established swing traders will also be aware of and factor in the maxim that Forex markets trend over the long term, and experience counter-trend moves and mean reversion over shorter time frames.
Positional traders take a long-term view and may keep trades open for weeks or months. They are less interested in background market noise, instead preferring to focus on bigger picture macro themes such as the relative performance of an economy or currency compared to another. Positional traders typically scale into and out of positions perhaps adding to them as the trend or metric they are backing moves in their favour, or reducing their exposure if it does not.
By nature, positional trading can be capital intensive and, when applied to margin trading, can incur ongoing overnight swap charges. Of course, being long-term focused and considered in their trading, the Positional trader will have factored that into their risk-reward calculations and will monitor their capital commitments and running costs throughout their trading lifetime.
Analysis in Determining Trading Styles
There are many factors that will help to determine your trading style. Perhaps one of the most important will be how you analyse the markets. There are two significant styles of market analytics traders tend to follow, although I prefer to combine both.
Technical analysis is concerned with the study of price, volume and momentum. There are many disciplines within the technical analysis sphere. Nearly all of these record an instrument’s price action over time, noting key data such as the high, low, open and closing levels in the price of an instrument over a specific time frame while using charts as a medium. Traders apply studies and indicators to those charts with the aim of using the historical price action to predict what will occur in the future, be it in five minutes or a full week ahead.
Fundamental analysis focuses on changes in the macroeconomic background to determine what is likely to happen to an individual or group of economies and the instruments associated with them. Typically data from two or more economies are compared to each other and particular attention is paid to the relative rates of change in the data, for example, rates of unemployment or inflation. Fundamental analysis is usually the preserve of longer-term swing or positional traders, though knowledge of the relevance and likely impact of data releases could help short-term traders too.
Which Style is Right for You?
The best way to determine which of these trading styles or approaches is applicable or best suited to you is to do a quick audit of the time you have to dedicate to trading and how you’ll be conducting your trades.
Scalping requires the most time and attention from the trader, as opposed to Swing and Positional trading styles. These styles can, however, require more capital and overnight exposure, something that you might be less comfortable with.
When it comes to how you’ll trade, you should consider where you’re most likely to trade from and from what device. Trading from an app on your mobile phone on the way to work might be a perfect opportunity for a Positional or Swing trader to check market activity and their current positions, but it won’t work for a Scalper looking to take quick and considered action.
If you’re interested in reading more about trading styles of notable Forex traders, check out this article on trading styles defined by notable Forex traders. Whatever your trading style or preferred method of analysis, Pepperstone has the trading tools and infrastructure to help you get the best out of your trading. Talk to your trading specialist today.