All traders are not created equal. Traders are people and people have lives. Not everyone that comes to the business of trading will have the same amount of time they can commit to learning the process of trading. Equally, not everyone will have the same amount of time to commit to actually deploying what they have learned in the financial markets. It is for these reasons that there are three different types of traders that are the most common in the financial markets. Of these trader types, the main thing that differentiates them is the amount of time that is spent in a trade.
In this Wiki, we will take a look at Position Trading, Day Trading and Scalping and describe what they are so that you can decide which style best suits your lifestyle and the level of commitment that you are able to give to the financial markets.
The 3 Main Trader Types
One of the things that will make you a skilled trader is knowing when to apply a certain strategy and when to leave the market alone. The type of strategy that you use will be based on what type of trader you want to be. The type of trader that you want to be will typically be based on how much time you have to commit to trading in the financial markets. The type of strategy you use will also be based on the prevailing sentiment and market conditions that are currently taking place.
With The 6 Essential Elements of Forex Trading in mind, the next step is to determine what type of trader you are or want to be. For example, if your goal is to manage Prop firm money and day trade amidst the hustle and bustle of a busy trading floor then your trading style will be different than if your plan is to eventually run an investment fund and manage billions worth of pension money.
Keeping your goal of what role you want to grow into in mind, you do need to take into consideration the amount of time that you actually have to commit right now.
Trading can be broken down into 3 main types. These types are differentiated by the amount of time a position is held in the market. The 3 main types of traders are:
- Position traders
- Day traders
Yes, there are other types of forms of trading such as algorithmic or high-frequency trading but those can still be broken down into the time frames of one of the three main trading styles mentioned in this Wiki.
We will now run through each of these trader types to give you an understanding of the differences between them.
Position trading is basically taking a long-term view of the market and placing trades in accordance with your long-term fundamental view. If you wish to do this you will not be very active at your desk making trades every day. You will still look at the market and take in any important market-moving news that may impact your trade, but you won't be placing a new trade very often. A change in sentiment can lead to an overall change in the fundamental trend which is why you will need to look at market information daily.
Just because you are a position trader does not mean that your analysis should be much different than other trader types. The main difference will be that you are using the short-term sentiment to give you better entry prices into a longer-term trade rather than trying to catch the short-term price swings for a profit.
With position trading, your main focus will be on where the price will eventually get in the medium to long term rather than where it ends up today.
For example, in 2013 The Bank of Japan (BOJ) launched their version of Quantitative Easing (QE) which meant that the Yen would inevitably weaken against currencies that were exiting their own QE program or had decent economies comparatively. The US dollar was a prime example of a country exiting its own QE program. Most analysts predicted that the USDJPY would hit 110.00 at some point in the future and the [[The_Bank_of_Japan | BOJ] confirmed that this was their aim. Japan being an exporting country naturally likes a low value to their currency because this helps to support their exporting companies.
When QE was launched the price of the USDJPY was around 90.000. Eventually, the price did hit 110.000 and then some but it took about 18 months to get there and there were lots of pullbacks along the way. Sometimes these pullbacks were hundreds of pips as the market fluctuated with the short-term sentiment.
Every so often the larger institutions would come in and buy the pair back when it reached a price that they deemed cheap based on the fundamental outlook. During this time position traders would be waiting for the pair to sell off so that they could get into USDJPY long at a much better price and ride the move up for maximum profits. The more it fell the better the opportunity became and the more money the position traders could potentially make.
These kinds of longer-term moves occur all the time in Forex as central banks change their stance or implement new policies. As a longer-term trader, you are using all of the same tools as a day trader but with a different outlook. Instead of trying to find a good technical entry using price measurements from the last session, you will be looking at key levels that have formed over the past few weeks and months. Instead of watching economic releases to try and trade in the current session, you will be watching these releases over weeks to see if there are any trends occurring that could lead to a change in the fundamental picture and thus a change in a central bank’s policy.
In the example of QE we just looked at the BOJ was focused on inflation. This meant that if the Consumer Price Index (CPI) started showing strong signs of improvement over several months the bank could be tempted to end their program sooner. On the other hand, if there is not enough improvement then they might actually decide to expand their QE program. This is the kind of information that a position trader is most interested in. They don’t care if US retail sales came out bad last month, although it might cause a short-term sell-off on the US dollar, it will not change the fundamental direction of the USDJPY in the long run.
The big focus of a position trader is the ultimate price target based on what the analysts are expecting and what the central banks themselves have identified as their end goal. The secondary focus is on what is happening with the economic data in terms of if and how it will affect the overall trend that they are trading.
As a position trader, how will your process look?
You will be following the same trading process but your focus will not be quite as intense once you are in a position as a scalper would be. A day trader, for example, will be watching the news for any slight event that they could react to during the session. But a position trader will do their analysis, execute their position, and then take a much more hands-off approach to trade management. They too will have the protection of a stop loss which will be much larger than that of a day trade but the same principles of risk management apply.
Position traders will want the protection of a stop loss in case something big does change fundamentally while they are not at their screens. The stop also helps to protect against short-term changes in the direction based on sentiment, which while temporary, can sometimes move the market hundreds of pips as in the case of safe haven flows or periods of intense volatility.
It is common for a position trader to conduct their analysis once per day to ensure that everything is in place and that the reasons they entered the market have not changed. They use this time to adjust their trade management in line with their plan.
Position trading is generally the best route if you have trouble with your emotions and want to limit your focus but it is also better for trading larger funds because you are not going to experience slippage that plagues day traders and scalpers managing larger accounts.
Because your trades are much bigger and the exact [Price_Action_Analysis | price]] of entry and exit is not so important this will also remove an element of pressure from your trading. This has been called part-time trading but it is very important to understand that just because you are not as active in your trade management it does not mean that you should reduce the amount of research and analysis that you put into your positions. In fact, doing so will most likely result in losses in just the same way it does with shorter-term trading. This highlights how the process is the same and the only thing that differs is your overall view and the amount of trade management that you implement.
Shorter-term position trading may be called swing trading which looks to hold a trade for 2-7 trading days. Sometimes a little more, sometimes a little less but typically not much longer than a week.
This is the most common style of trading. This is what you will most likely be doing and is also the reason that most trading floors exist in the first place. Day trading is mainly focused on trading intraday price moves and taking advantage of the prevailing sentiment.
The main focus of your trading should be on your overall analysis of why you are taking certain trades and your own psychological state. This will be true for the rest of your trading career. Practicing based on these two things will develop your skill set very quickly and dramatically improve your overall results.
Day traders typically actively buy and sell securities, sometimes multiple times per day. They typically don't carry open positions into the next day but this is not always the case. Technically, after the US session ends at 5pm Eastern Standard Time this is when the new day will start. Many day traders will carry positions that they opened in the New York session into the Asian session even though this is considered a new day. So day traders may technically hold positions for more than one day.
Buy and sell positions taken during a trading day are typically squared off on the same day before the market closes or switches to the next day. Day traders are different from swing or position traders who may hold a position for multiple days, or from investors who invest for longer periods.
Day traders typically use leverage to increase their intraday trade exposure in the hopes of increasing gains.
Scalping is also a form of day trading but is a unique style that can exponentially increase the size of your account but also the size of the risk that you are taking. The reason traders love scalping is that it allows them to utilize leverage in a much safer and much more controlled environment while reducing the negative elements of sentiment changing on them as much as possible. The downside of this is that you are still at the mercy of black swan events and times when there is just no liquidity in the markets to get the trades and stops filled.
Remember, you can be a very successful trader over decades and then one event combined with using too much leverage can wipe out your entire portfolio of accounts and your reputation with it. Not many clients will invest in a manager who lost 100% of a previous client's fund book.
Scalpers have to accept that some of their risk management defences will be down and that their trading is always going to be exposed to a significant amount of risk. Having said that, there are many traders that still choose to go down this road.
Typically it is not the best idea to start off as a scalper before you have mastered the process of day trading which most of the information in our Wikis are geared towards. This is because scalping is much faster-paced than day trading and if you don’t have a good grip on the processes of day trading then you will be exposing yourself to a lot of risks that you don’t necessarily need to be taking.
One thing that is worth noting is that the process of scalping is identical to everything we have looked at in the Wikis on Fundamentals and Sentiment. The analysis process is exactly the same with one key difference being the fact that there is a much more clear focus on the technicals and the trade management side of the trade. For example, unlike position trading, the entry is pivotal to your success as a scalper because you need your stops to be as tight as possible in order to maximize your returns which will typically be smaller on a per-trade basis. With position trading, your entry can be less precise because you will have a much wider stop loss than a scalper would. However, scalpers will typically have many more trades. To hone your entry you will need to analyze the technicals in precise detail on every trade. Having the perfect technical setup will be imperative to your success.
We will be looking at scalping techniques in other Wikis in more detail but the most important thing to bear in mind is that you can make more money but it comes at the expense of more stress and more dedication to screen time. With scalping you shouldn't leave your screen for a minute and your focus has to be laser sharp. This can get very stressful without regular breaks so make sure to factor this in when deciding whether or not scalping is for you.
In the end, you will be judged on your results, not your trading style. Generally, high net worth investors are looking for consistent and stable returns with low drawdown rather than high performance with higher drawdown or risky volatility. This is why most traders managing client funds go the way of day or position trading and the scalpers tend to be the ones with smaller accounts managing their own money because it’s just not as client-friendly.
If you are hoping to build up a successful managed accounts business then it’s best to look at being a day trader because it’s a nice balance between the stresses of scalping and the more relaxed nature of position trading.
The benefit of being in the middle of the trading styles comes down to your commissions. For example, if you make 2% per month consistently with single-digit drawdowns your clients will be your biggest fans no matter what your trading style is. If you make that 2% by trading several times per day then you will be loved by the clearer or broker because you will be generating decent commissions and volumes which is what they live off. As a trader, you can also get a cut of these commissions which keeps your income more consistent and stable. If you are a position trader making this same 2% then you will not have this advantage and will find it harder to sustain yourself during the early years as you build up your track record and your book of clients.
This is all worth bearing in mind when selecting your trading style and is why most traders decide to go the way of day trading; it’s simple, stable, and consistent with the ability to remain protected from most market conditions.
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