Are you a medium-term technical trader that uses automation software to place your Forex trades, or are you more of a long-term fundamental trader that places discretionary trades? Neither? With so many different ways to trade, it’s difficult to keep track of them all. Traders come in all styles in flavors which is the topic of today’s discussion.
Technical vs. Fundamental
Technical analysis is the art of studying past price behavior and attempting to anticipate price moves in the future. These are traders that focus solely on price charts and often times incorporate indicators and tools to assist them. They look at price action, support and resistance levels, and chart patterns to create trading strategies that hopefully will turn a profit.
Fundamental analysis looks at the underlying economic conditions of each currency. Traders will turn to the Economic Calendar and Central Bank Announcements. They attempt to predict where price might be headed based on interest rates, jobless claims, treasury yields and more. This can be done by looking at patterns in past economic news releases or by understanding a country’s economic situation.
Short-Term vs. Medium-Term vs. Long-Term
Deciding what time frame we should use is mostly decided by how much time you have to devote to the market on a day-to-day basis. The more time you have each day to trade, the smaller the time frame you could trade, but the choice is ultimately yours.
Short-Term trading generally means placing trades with the intention of closing out the position within the same day, also referred to as “Day Trading” or “Scalping” if trades are opened and closed very rapidly. Due to the speed at which trades are opened and closed, short-term traders use small time-frame charts (Hourly, 30min, 15min, 5min, 1min).
Medium-Term trades or “Swing Trades” typically are left open for a few hours up to a few days. Common time frames used for this type of trading are Daily, 4-hour and hourly charts.
Long-Term trading involves keeping trades open for days, weeks, months and possibly years. Weekly and Daily charts are popular choices for long term traders. If you are a part-time trader, it might be suitable to begin by trading long term trades that require less of your time.
For a more in-depth look at multiple time frames and how to integrate them properly, check out The Time Frames of Trading.
Discretionary vs. Automated
Discretionary trading means a trader is opening and closing trades by using their own discretion. They can use any of the trading styles listed above to create a strategy and then implement that strategy by placing each individual trade. The first challenge is creating a winning strategy to follow, but the second (and possibly more difficult) challenge is diligently following the strategy through thick and thin. The psychology of trading can wreak havoc on an otherwise profitable strategy if you break your own rules during crunch time.
Automated trading or algorithmic trading requires the same time and dedication to create a trading strategy as a discretionary trader, but then the trader automates the actual trading process. In other words, computer software opens and closes the trades on its own without needing the trader’s assistance. This has three main benefits. First, it saves the trader quite a bit of time since they no longer have to monitor the market as closely to input trades. Second, it takes the emotions out of trading by letting a computer open and close trades on your behalf. This means you are following your strategy to the letter and are not able to deviate. And third, automated strategies can trade 24 hours a day, 5 days a week giving your account the ability to take advantage of any opportunity that comes its way no matter the time of day.
If you are interested in automation, but don’t know how to create a strategy or know how to program, check out FXCM’s Mirror Trader platform. There are 100’s of strategies to choose from that are completely free!
---Written by Rob Pasche