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LEARN FOREX – Which Trading Style Suits You Best?

By , Forex Trading Instructor
30 October 2012 03:00 GMT

When a trader finds the style of trading that suits them best a light often turns on and they never look back. A trader who isn’t comfortable with a style or has not found a home in a specific trading style is the one who most often commits the biggest sins of trading.

LEARN_FOREX_Which_Trading_Style_Suits_You_Best_body_Picture_4.png, LEARN FOREX – Which Trading Style Suits You Best?

Chances are you’re not comfortable in your trading style if you find yourself doing the following:

Overtrading your account

-This often happens after a streak of good or bad trades and is rooted in fear and greed being uncontrolled.

Averaging down or adding to a losing position

-When a trade goes against you, if you don’t know who you are as a trader you’ll often keep adding to your position hoping to squeeze a profit out of the trade. This is a poor business decision and it often ends poorly.

Trading on a whim and not analyzing yourself at the end of the week, month, or year

-Most successful traders keep trading journals.Even if it is painful to study past trades as you’re getting started, you’ll benefit immensely from seeing the numbers and will prevent you from repeating mistakes.

Keep adjusting stops as the market goes against you because you’re afraid to take a loss.

-This is a clear sign that you’re not firm in your identity as a trader

More willing to trade off tips than your own trading system

-Straight from the classic book on trading successfully, Reminiscences of a Stock Operator:

“A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s tip, I must sell those stocks on Smith’s tip. I am depending on him”

-Jesse Livermore

Every trader has a system as different as their fingerprint that clicks the mouse and enters a trade. Each trader will develop an inclination for specific pairs, time of day, trade size, and trading tools that will culminate their own trading system.

So what does your fingerprint look like as a trader? Let’s break down the most common styles of trading. You can use the following descriptions as a launching pad to find one that suits you best.

LEARN_FOREX_Which_Trading_Style_Suits_You_Best_body_Picture_3.png, LEARN FOREX – Which Trading Style Suits You Best?

Different styles of trading the Forex Market:

Buy (or Sell)-and-Hold

-Common with carry trading or yield chasers

Position Trading

-Common with trend followers

Swing or Overnight Trading

-Common with short term momentum plays off news breakouts

Scalping

-Extremely short term trading and never holding a position overnight

Buy (or Sell)-and-Hold Investor:

*Objective: Long term capital appreciation while earning interest off the rollover, also known as the carry trade

*Analysis Preference: Long term charts (weekly) and fundamental analysis of economies

*Trade holding time: Multiple months to multiple years

*Trade Frequency: 1 – 10 trades per year on average

*Targeted Return: Above common equity indices, 7-15% annual return target on average

The 1st Lesson on DailyFX for Carry Trade Strategy is available here.

This type of investor / trader will often study long term charts like this weekly EURUSD chart:

LEARN_FOREX_Which_Trading_Style_Suits_You_Best_body_Picture_2.png, LEARN FOREX – Which Trading Style Suits You Best?

(Created with FXCM's Marketscope 2.0 charts.)

Position Trader:

*Objective: Monthly to quarterly income from trends or well defined ranges throughout the quarter or market cycle

*Analysis Preference: Medium-term charts (Weekly, Daily, and / or Intraday hourly) with a focus on Technical Analysis.

*Trade holding time: 1 week to 3 months

*Trade Frequency: 2-7 trades per monthor 6 – 21 per quarter on average

*Targeted Return:Common goals of 10-30% annual return target on average

The 1st Lesson on DailyFX for Trend Trading is available here.

Swing Trading (Very common in Forex):

*Objective: Weeklytomonthly income from trends or well defined ranges throughout the month

*Analysis Preference: Chart reading on intraday or hourly charts with a focus on short term patterns.

*Trade holding time: 48 hours – 4 weeks on average

*Trade Frequency: 5-15 trades per month on average

*Targeted Return:Moderately higher than average trader, 30-50% annual return target

The 1st Lesson on DailyFX for trading daily ranges is available here.

Day Trading / Scalping:

*Objective: Daily income from multiple closed trades throughout the day

*Analysis Preference: Chart reading on minute or hourly charts at the most. Common time frames for analysis are the 1 hour and 15 minute candle charts

*Trade holding time: Minutes to a few hours, never overnight.

*Trade Frequency: 5 or more trades per day on average

*Targeted Return:A gain of 50% + annual return target

The 1st Lesson on DailyFX for Trading the News is available here.

This type of trader will often study short term charts like this 15 EURUSD chart with chart reading indicators:

LEARN_FOREX_Which_Trading_Style_Suits_You_Best_body_Picture_1.png, LEARN FOREX – Which Trading Style Suits You Best?

(Created with FXCM's Marketscope 2.0 charts.)

Each of these trading styles requires and increasing investment of time. In other words the Buy (or Sell)-and-Hold investor will spend much less time analyzing good trades than the position trader. Subsequently the position trader will spend less time in front of the screen than the swing trader and so on.

So which style is best?

The best trading style for you is the one that you have the time to employ and the inclination to stick to. Many traders want to be scalpers or day traders but find the time commitment is too much for them to keep up with alongside their 8-10 hour a day job.

Naturally, the first two options require a great deal more patience than the latter two.

All styles rely heavily on strong money management and trade size for their success.

---Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@fxcm.com.

To be added to Tyler’s e-mail distribution list, please click here.

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30 October 2012 03:00 GMT