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 bests suits your lifestyle and the level of commitment that you are able to give to the financial markets.
The Three Main Trader Types
Let’s now have a look at some examples of strategies that we use to trade the markets. Specifically, we will show you how you can get to grips with these strategies, learn how to apply them and figure out the ones that fit your personality best.
As with the entire principle behind this training our goal is not to spoon feed you a method that will work all the time that you can trade blindly. This is because as much as that would be lovely and simple that is not how the markets work. What will make you a skilled trader is knowing when to apply a certain strategy and when to leave the market alone. This will be based on the prevailing sentiment and market conditions which this can only be developed through practice and experience trading the markets in real time.
It’s very important to set your expectations correctly because your trading skills will sharpen over time with dedicated practice. You should not expect to take this course and be managing millions a few weeks later. It simply does not work like this because your skills will develop over months and years rather than days and weeks. This is no different than any other skilled profession. However, by learning successful strategies that are proven you will shorten the learning curve substantially and reduce your development to just the time it takes to practice in the real markets what you have been shown in this training course.
It’s important to understand that your strategy is not the major thing that will make your trading business a success or failure. The absolute best way for you to learn the process of finding trades and identifying the best currencies will be trading the current session by following along with the news feeds and information sources we have discussed. If it was as easy as blindly following a mechanical strategy then 95% of traders would be profitable instead of the reality that 95% of traders lose money.
Remember that all strategies are employed only after the analysis phase is complete. Don’t think that because you have a system that you can cut out any of the 4 phases because they are relevant no matter how you execute your trades or what you base your trades on.
With all the phases in mind and the 4 elements of professional FX trading explained the next step is to determine what type of trader you are or want to be. For example, if your goal is to manage client accounts and day trade amidst the hustle and bustle of a trading floor then your outlook and style will be slightly different than if your plan is to eventually run a fund and manage billions worth of pension money.
Trading can be broken down into a few key styles:
- Position trading
- Day trading
- Scalping
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 traders types to give you a nice understanding of the differences between them.
Position Trading
Position trading is basically taking a long term view of the market and making trades in accordance of that long term view. If you wish to do this you will not be very active at your desk every day.
The 4 phase process is exactly the same because even though you are not trading the short term sentiment you still need to be aware of it. Sentiment can lead to an overall change in the fundamentals which will impact your longer term holdings.
Just because you are a position trader does not mean that your analysis should be any different. The main difference will be that you are using the short term sentiment to give you better entry prices on 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 BOJ launched their version of QE which meant that the Yen would inevitably weaken against currencies that were exiting their own QE program or had decent economies comparatively. The USD dollar was a prime example of a country exiting its own QE. Most analysts predicted that the USDJPY would hit 110.000 at some point in the future and the 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 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 the market 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 made.
These kinds of longer term moves occur all the time in FX 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 good technical entry using price measurements from the past session you will be looking at key levels that have formed over the past few weeks and months. Instead of watching economic released to try and trade in the current session you will be watching them 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 focussed on inflation. This meant that if 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 really bad last month, although it might cause a short term sell off on the USD, 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 4 phases in the same way but your focus will not be quite as intense once you are in a position. 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 the trade management. They too will have the protection of a stop loss which will be much larger to that of a day trade but the same principles apply.
Position traders will want the ultimate protection 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 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 plague day traders managing larger accounts.
Because your trades are much bigger and the exact 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.
Day Trading
This is the most common style of trading. This is what you will most likely be doing and the reason that most trading floors exist in the first place. We are mainly focussed on trading intraday and taking advantage of those prevailing sentiments.
The entire process we have laid out in this course has been formed with the day trader in mind but the point is that it doesn’t really matter whether you are day trading or not. What you should have noticed is that your main focus of your trading should be on your overall analysis 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.
We won’t go into every aspect of a day trader here because we have already done so throughout this entire course and training.
Scalping
Scalping is also a form of day trading but is a unique style that can exponentially increase the size of your account. The reason traders love scalping is because it allows them to utilize leverage in a much safer and much more controlled environment while reducing the negative elements 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 that lost 100% of a previous client fund book.
Scalpers have to accept that some of their risk management defenses 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.
Scalping is also much harder psychologically because of the potential risks that are involved. You really do have to be focussed on your analysis and you psychology to the max.
We don’t suggest trying to start off as a scalper before you have mastered the process of day trading. 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 doing.
One thing that is worth noting is that the process of scalping is identical to everything we have looked at in this section. 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 small as possible in order to maximize your returns which will typically be smaller on a per trade basis. However, you 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 unlike the other forms of trading.
We will be looking at scalping techniques later on in more detail but the most important things 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. You can’t even leave your screen for a minute and your focus has to be laser sharpe. This can get very stressful without regular breaks so make sure to factor this stuff in when deciding whether or not scalping is for you.
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 trading and the scalpers tend to be the ones with larger accounts managing their own money because it’s just not very 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 much 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 almost any market condition.