It is often said that no two traders are the same. Each possesses his or her own personality traits that factor in their trading preferences, not to mention lifestyle differences that can also influence the type of trading strategies they implement.
For instance, there are traders which are more aggressive and don’t shy away from taking huge risks while there are others who are more conservative and would rather cherry-pick their positions. There is no right or wrong trading approach in this regard, and part of your job as a trader is to identify which type of strategy would suit you best.
As previously mentioned, there are a number of components which must be considered when deciding which trader-type someone is, or would like to be; first is whether the trader in question is trading full, or part-time. This should then help to determine the schedule which would be followed, and how long the positions can be held on to. Next is risk tolerance, which involves outlining how many trades can be opened in a day, as well as which gains to go for, and how to limit risks. This also aids in the clear assessment of the traders’ knowledge and experience.
Displayed here below are the trader types that one may choose to identify themselves with:
As the name implies, day traders hold on to positions for a day. Day trading can still involve short-term time frames but the activity isn’t as fast-paced as that of scalping. Day traders can keep a few positions open for hours but typically would like to end the day by closing everything out.
This type of trading strategy is suited for those who are able to monitor their positions throughout the day or the trading session, making the necessary adjustments such as trailing their stops or adding to their positions along the way. Fundamentals usually play in this type of trading, which means that you need to be able to keep track of economic reports released for the day or any headlines that might influence your position.
Intraday inflection points are also important considerations, as day traders can look at the average movement of a particular pair for a day to determine whether reversals or continuations are in order.
As you’ve probably guessed, swing traders keep their positions open for more than a day and focus on medium-term time frames such as 4-hour or daily charts. This usually involves trying to catch ongoing trends or pinpointing market tops and bottoms.
With that, swing trading involves a larger degree of patience compared to scalping or day trading. This also means that you may need to be able to tolerate placing larger stop losses and going for larger targets, even dealing with intraday noise that can sometimes lead your positions to be in the red for a while.
Swing traders usually take fewer positions compared to scalpers and day traders, too. This can allow you to pick setups that you think might have a higher probability of turning out profitable rather than taking multiple setups all at once. Technical tools, such as leading and lagging indicators, are often applied to gauge where trends might start and end.
Lastly, position trading requires the greatest amount of patience among these trading styles, as this can involve staying in a trade for weeks or months at a time. Spreads and transaction fee no longer factor into your bottom line as much, but what’s more crucial to consider is the carry or rollover.
You see, brokers apply interest rates on positions that are kept open overnight and these rates are based on the benchmark rates offered by central banks. For some position traders, it’s important to maintain a positive carry that may add to their profits, which means going long a currency that has a higher interest rate against a currency with a lower interest rate.
Although they keep positions open for a long time, position traders still need to check in their trades every now and then to spot any opportunities that may allow them to maximize their success along the way. Fundamentals are seen to play the biggest role in determining the longer-term direction of price action so a solid understanding of economics and market forces may be a position trader’s strongest tool.
Position trading also requires a certain degree of resilience since large stops are required to stay in prolonged trends. This means that you’d have to be able to filter the short-term noise that typically causes large pullbacks and keep your eyes on the bigger trends.
Also, position trading requires a large amount of capital that can weather hundreds of pips in corrections without getting a margin call. If you are easily swayed by various market opinions that may cause you to panic and exit your positions right away, you might need to think about shifting to a shorter-term trading style.