Forex is a very dynamic and liquid market, and there are several ways that you can trade and make money from it. There are different trading styles which can be used in Forex. And it’s important to find the right style for you because what works for one investor may not work well for another. In this article we will look at the four main trading styles used in Forex: day trading, swing trading, scalping and position trading.
Day trader is usually a person who makes a living from Forex trading and who often starts and ends a trade within the same day. Day trading is a short term trading method, which requires you to spend a lot of time analyzing the markets and monitoring your trades. This way of trading is known as the most demanding of all types and it is often believed that in order to become a day trader you have to master scalping and swing trading first. Day traders are usually devoted to Forex trading entirely, and are treating it as a full-time job.
There are three major types of day trading – trend trading, counter trend trading and breakout trading. The first type uses the overall trend from a long time frame chart and applies it to a short time frame charts. For example, a trend trader can look at a 3-hour chart and determine the overall trend with the help of various indicators, after which he will switch to a 5-minute chart and search for the best entry point according to that trend.
Counter trend trading, on the other hand, is a technique that again uses the overall trend from a long time frame chart but this time the trader aims to catch the reversal by opening trades with direction opposite to the long-term trend.
Breakout trading is a bit different from the other two because here you need a currency pair that has been trading in a range for a while. The idea is to time correctly a breakout, no matter in which direction. Therefore, traders need to set up entry points both above and below the support and resistance levels and wait for the big move.
Scalping is a very fast and dynamic way of trading Forex. The positions stay open for only a few minutes and sometimes even seconds. Traders who use scalping want to get the most out of the price movements during the busiest times of the day. Instead of waiting for the big hit after several days or months, scalpers prefer to make profits by reacting very fast to market movements.
To be a successful scalper you need great discipline, quick thinking and the ability to monitor and analyze charts for long periods of time. In addition, scalpers need to have very good risk management strategy, since they often use higher leverage, which can increase your profits but also your losses.
Swing trading is practiced by more patient Forex traders who prefer to keep their trades open for several days. Here you do not have to monitor your trades constantly but still need to dedicate some time to follow and analyze the market every day.
Swing trading is considered the transition stage between occasional trading and day trading and is often preferred by people who have a full-time or part-time job but already have some knowledge of the Forex market. As the trades are held for more than just one day, you should consider larger stop losses and be prepared for market fluctuations that might go against you.
This type of Forex trading is typically preferred by supporters of the fundamental analysis who prefer to keep their trades for several months and even years. In order to make money with position trading you are forecasting future market events, which sometimes means that your prediction will go against the common sense beliefs at that time.
Probably the most difficult task for position traders is to identify a potential profitable opportunity. It takes a lot of courage and a great deal of market knowledge to open a position, which may be considered unpopular by the majority of Forex players. Another thing to keep in mind is that you will need strong money management techniques to get you through the ups and downs on the road to your ultimate goal.
Choosing the right trading style for you
Each of these styles is different both in terms of the time that is necessary to open, close and maintain a position and in terms of the investment philosophy that stands behind them. Whether you will choose to be a day trader or a swing trader depends entirely on your personality, skills and market knowledge. You can try different styles in the beginning, using a Forex demo account or a live account, and once you find the right style for you, you should stick to it and improve for long-term profits.
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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.