There are 4 main styles of forex trading. These trading styles are classified based on the timeframe they are traded on, the length of the time for which the trade is held and the size of the price movement. So, let us try to understand how are these trading styles different from each other and what is the purpose of each one.
Scalping is a very aggressive trading style and there are a lot of risks involved in it. But then, it has got great rewards too. Scalping is a trading style in which the traders use 1 minute to 15 minutes timeframe to place a trade and profit from very small or minimal price movements. Scalpers make trades on the smaller timeframe and get out within seconds or minutes.
Purpose of scalping
The main purpose of scalping is to make the good use of leverage that the broker provides you and use it to turn your small accounts into bigger ones. Scalpers mostly aim for trades with r:r of 1:1 or 1:2 and they search for a lot of trades during a trading day and closes them within a couple of minutes. On average, a scalper takes at least 20 trades a day and target small profits which when compounded gives you bigger gains.
Things to consider in scalping
1. Account type
Every pip counts for a scalper and wide spreads is a big NO for scalpers. So, while choosing a broker, make sure you choose one who provides you with low and tight spreads.
Furthermore, scalpers mostly profit from small movements and enter a lot of trades on a daily basis, so commissions are a big factor for scalpers as high commissions can eat up your gains in a long term. So, make sure you chose a broker that provides you with tight spreads and low commissions.
2. Pairs to trade
Pairs that have high trading volume provides you with low and tight spreads. So choose pairs that are more liquid and have high volatility, such as USDJPY, EURUSD,GBPJPY,GBPUSD etc.
3. Best time to trade
It is good to trade during London and new york session when the volatility is high. But the best time is when the two sessions overlap each other I.E from 2:00 am to 4:00 am and from 8:00 am to 12:00 noon Eastern Time (EST).
4. Risk management
Just like all other trading styles, risk management is the most important aspect of scalping. It is important for you to develop or follow a risk management plan while scalping.
5. Avoid trading during news
Trading during news release can lead to a serious disaster as pairs can move ver impulsively while the news release. So, make sure you avoid scalping 30 minutes before news and only get into trades 30 minutes after the news is released.
Who should choose scalping?
Scalping is best for traders who can spend more time on charts and can make quick and difficult decisions without hesitating.
Scalping also requires a lot of focus and concentration, you if you have got it, you can be a scalper. Furthermore, you get a lot of setups while scalping, so if you are one of those impatient traders then go for scalping.
Who should avoid scalping?
Anyone who cannot give continuous-time to chart and cannot focus on trading straight for a few hours should not try scalping at all. Plus the traders who cannot make quick and difficult decisions should avoid it as he/she may get a lot of stress doing this.
2. Day trading
Day trading is the most famous trading style in the forex industry. In day trading traders buy/sell currencies within the same day, i.e. traders open and close their trade in a single day and no trade is held overnight.
Day trading is a trading style in which the traders use 30 minutes to a 4-hour timeframe to open a position and profit from medium price movements throughout the day. Day traders open their position based on the analysis on 30 minutes- a 4hour timeframe and closes all of their positions on that very day.
Purpose of day trading?
The main purpose of day trading is the same as that of scalping. You get to make the good use of leverage that the broker provides you and use it to turn your small accounts into bigger ones.
The only difference is that here, you can aim for higher R:R of around 1:3 or even more depending upon the market conditions and you get a good amount of setups to trade. Not as many setups as you get in scalping but still a good amount of setups. Day traders open a trade and close it before the next trading day starts and don't like to hold positions overnight.
Things to consider in day trading?
1. How much time can you give?
Day trading is very different from all the other types of trading styles and it requires a lot of time and effort. You have to dedicate a lot of time to reading charts and be active throughout the day waiting for a setup to form.
2. Risk management
Just like all other trading styles, risk management is the most important aspect of day trading. It is important for you to develop or follow a risk management plan while day trading.
3. Fundamental news
As a day trader, you will be trading throughout the day whenever the opportunity occurs. As there are different fundamentals news scheduled throughout the day, it is very important for you to be up to date with that news.
Who should choose day trading?
Day trading is for those can spend the whole day on charts, it is just like a full-time job.
You will have to analyze the charts at the beginning of the day and monitor it throughout the day just like you do any other 9-5 job. You will get fewer setups as compared to scalping and will have to be a little patient. So, if you are okay with getting a few setups and spending a whole day on trading then you can choose day trading.
Who should avoid day trading?
Anyone who cannot give continuous-time to chart and cannot focus on trading throughout the day. Someone who does a day job should avoid day trading strictly as he/she may not have the time to analyze or monitor the trades.
3. Swing trading
Swing trading is the type of trading style in which the trader opens a position and keeps it running for days or weeks till his trade potential is reached. Swing trading is a long term trading style and requires a lot of patience.
In swing trading, you have to identify the medium to long term trends and rip its benefits. We are big fans of swing based trading and we believe it is very easy to earn money through swing trading as compared to any other trading styles. It just requires knowledge and a lot of patience.
Purpose of swing trading?
The purpose of swing trading is to identify the medium to long term trades and try to keep noise aside.
You can earn a lot of profit through a single trade but it takes time for a trade to play out. As it takes a day or a week for a trader to close a trade, the stop loss used in it is wide and also there are few setups through the day. In swing based trading style you can aim for R: R as high as 1:5 or even higher.
Who should choose swing trading?
Traders who have a full-time job and only do their analysis on weekends and keep a check on during the weekdays can easily do swing trading as it is less time-consuming. If you have a part-time job then you can easily choose a swing based trading style. If you are patient enough to wait for trades and have long term goals then you should choose swing based trading style.
Who should avoid swing trading?
If you are impatient, swing trading is not for you. If you want multiple setups and want quick profits, swing trading is not the right choice for you. Swing-based trades usually have higher-stop loss and trades often go in loss before moving in your direction. This can lead to several emotional problems which may affect your trading.
4. Positional trading
Positional trading is the type of trading style in which the trader opens a position and keeps it running for weeks, months or even years. Positional trading is a long term trading style and requires a lot of patience. It is mostly used by banks or hedge funds and all the big investors.
Positional trading is the same as that of investing, you need to do it for the long term and be patient enough for your trade to work. In positional trading, you have to identify the long term trends based on the fundamentals of the currencies involved in a currency pair.
Who should choose positional trading?
Anyone who has mastered patience. If you can control your emotions. If you are looking for long term goals. If you have a greater starting capital. Finally, if you have a greater knowledge of fundamentals.
Who should avoid positional trading?
Anyone who is expecting fast results and lacks patience should avoid position trading. If you don't have a greater starting capital. If you don't have enough knowledge about fundamentals and how it affects the currencies. If you cannot manage your emotions.
Which forex style should you choose?
When choosing a trading type to suit your needs, here are some questions which you should ask yourself.
Are you short term or long term orientated?
Short term - Scalping or day trading.
Long term - Day trading, swing trading or positional trading.
How much time do you have during the day to trade?
Whole day - Day trading.
5-6 hours - Scalping.
Can only check up on trades - Swing trading or positional trading.
Do you work full-time?
Yes - Go for swing trading or positional trading.
Part time - Go for scalping.
Don't work - Day trading.
Are you patient, or do you need to see results quickly?
Patient enough - Swing or positional based trading style is right for you.
Want quick results - Scalping or day trading is suitable for you.
It is very important for a trader to know which type of trading style is suitable for him/her. As only then he may have the required mindset for it and also keep expectations according to it. Many newbies don't give importance to this, but I can tell you that this simple thing makes a lot of changes in your trading. So, always choose a trading style that is appropriate for you.