Section IV: Trading Styles
The trading style you choose is directly correlated to the time you are able to devote to trading.
Short-term Trading Styles
· Scalping
· Daytrading
Long-term Trading Styles
· Swing trading
· Position trading
Scalping
· Traders open and close trades within a very short time scale, from seconds to several minutes.
· Scalpers tend to make many trades a day, perhaps even hundreds.
· They look for tiny profits on each trade (10, 5 or even less pips). Losses are also minimal.
· This type of trader often trade large positions.
· Scalpers often trade based on momentum, when there is a sharp move.
Time required devoting to such strategy: Scalping requires staring continuously at the screens for several hours. This strategy also requires constant focus.
Charts to look at: 1 minute
Advantages:
· Minimal risk per trade
· High system accuracy
· No fundamental analysis is required
· No overnight event risk
· Many opportunities each day
Disadvantages:
· Very high level of emotional stress and psychological pressure.
· Broker must have a fast execution service.
· This strategies usually have low RR ratio
· Most brokers don't like scalpers (sometimes the put them into manual execution service, a dealer execute his or her trades)
· High transaction costs. If a scalper makes 20 trades in the Euro and pays 3 pips of spread, he will pay $600 for spread on that day.
Common strategies:
· Breakout strategies (from short term consolidation periods)
· Quick bounces from support and resistance levels
· News and event trading (i.e. at a news announcement report)
Daytrading
Characteristics:
· Trades are opened and closed during the day, these trades last from a couple of minutes to a whole day
· This type of trading requires a high level of discipline and patience to wait for the right moment to enter the market.
· Most daytraders base their trades on technical analysis.
· Frequency of trades can go from one to five trades a day.
· Daytraders try to capitalize from the trend of the day
Time required devoting to such strategy: daytraders are required to monitor constantly the markets to time entries and exits. Not advised for those who have day jobs.
Chart to look at: 5 minute to 30 minute
Advantages:
· High potential for returns
· Daytraders can use a high RR ratio
· Able to capitalize on short term trends
· No overnight risk
· There is always another opportunity to make money
Disadvantages:
· Requires a systematic approach
· A high level of discipline and patience are required to trade this way.
· Different strategies should be used for different market conditions.
· Constant monitoring of news announcements (they can produce an adverse move that could hit your stop loss level.)
· You can be whipsawed by intraday market moves.
Common strategies:
A wide variety of strategies can be used when daytrading including:
· Trading based on chart patterns (double top, triangles, etc.)
· Based on technical indicators (MA, RSI, etc.)
· Based on price behavior
· Breakout trading
· Pullback traders
Swing Trading
Characteristics:
· Trades last from two to five days
· Swing traders attempt to forecast the medium term trend
· Positions are held overnight
Time required devoting to such strategy: Swing traders are only required to monitor their trades a couple times a day.
· High potential for returns
· Swing traders can use a higher RR ratio than daytraders.
· Since trades have a longer time span, they are not likely to be caught by “market noise”.
· Low transaction costs
· Emotional stress and psychological pressure is low in this type of trading
Disadvantages:
· A high level of discipline and patience is required to trade this way.
· This type of trading usually has low system accuracy.
· Overnight risk
Common strategies:
A wide variety of strategies can be used when swing trading including:
· Trading based on chart patterns (double top, triangles, etc.)
· Based on technical indicators (MA, RSI, etc.)
· Based on price behavior
· Breakout trading
· Pullback traders (from medium term trends)
Position Trading
Characteristics:
· Trades last from a couple days to several months
· Position traders attempt to forecast the long term trend
· Positions are held overnight
Time required devoting to such strategy: Position traders are only required to monitor their trades one or two times a day.
Charts to look at: 4 hour to daily charts
Advantages:
· High potential for returns
· Position traders can use a higher RR ratio than swing traders and daytraders. They usually use 5:1 or even higher.
· Since trades have a longer time span, they are not likely to be caught by intraday market moves.
· Low transaction costs
· Emotional stress and psychological pressure is the lowest in this type of trading
Disadvantages:
· Not able to capitalize the short term trend
· A high level of discipline and patience is required to trade this way.
· This type of trading usually has low system accuracy.
· Overnight risk
Common strategies:
A wide variety of strategies can be used when position trading including:
· Position traders usually focus on currency pairs that pay interest.
· Fibonacci levels tend to be very accurate on longer time frames
· Trading based on chart patterns (double top, triangles, etc.)
· Based on technical indicators (MA, RSI, etc.)
· Based on price behavior
· Breakout trading
· Pullback traders (from medium term trends
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