Trading styles can be divided into some categories, but these four examples are the most popular used by forex traders. Choosing the right trading styles can determine your success in the forex market.
Active trading is the act of buying and selling securities based on the short-term movement to get benefits from the price movements on the short-term chart. It is the opposite of buy-and-hold, a long-term strategy.
There are four (4) most known styles of active trading:
- Daily trading
- Position trading
- Swing trading
- Scalping
What is it like? Let's discuss them together in the article below.
1. Daily Trading
Daily trading is the most famous active trading style, and even often being considered as the meaning of active trading. As the name suggests, it is a method of buying and selling securities on the same day.
Traditionally, daily trading is done by professional traders. However, expert advisors open up the opportunity for a beginner trader to do so. Here are the pros and cons of day trading for you to consider.
| ✔️Pros | ❌Cons |
| Potential for high returns | Day trading can be extremely risky due to the high volatility of the financial markets |
| Opportunity to make a living | Traders may experience stress, anxiety, and emotional ups and downs as they make split-second decisions and manage potential losses |
| Improve a trader's ability to think quickly, react swiftly to market movements, and develop strong analytical and decision-making skills because of its quick-decision-making | Requires significant time and dedication |
| Day traders have the freedom to work for themselves, set their own schedules, and make independent trading decisions | Frequent buying and selling of financial instruments can result in high transaction costs |
2. Position Trading
Some people think that position trading is a buy-and-hold strategy and not active trading. However, when carried out by an experienced trader, position trading can be active trading. Position trading uses longer-term charts (from daily to monthly), combined with other methods to determine the direction of the market trend at that time.
The transaction made in this style can last for a few days until weeks and even longer, depending on the trend.
Traders who are paying attention to trends are trying to determine the direction of the market, but they are not trying to estimate each price level.
Usually, trend traders are following trends after the condition is steady. When the trend stops, they usually get out of their position. This means in a period of high volatility market, it is more difficult to make any transaction.
Here are the pros and cons of positioning trading:
| ✔️Pros | ❌Cons |
| Position trading requires less time and constant monitoring compared to day trading | Traders may need to wait patiently for their trades to play out |
| Reduced stress and emotional pressure | Position traders may miss out on short-term trading opportunities or quick market movements that could be profitable for day traders or swing traders |
| Potential for larger profits because of the chances to catch major market trends and capitalize on long-term price movements | Holding positions overnight or over the weekend exposes position traders to additional risks, such as unexpected news events or market gaps |
| Position trading relies heavily on fundamental analysis | It may take longer to realize those profits compared to shorter-term trading strategies |
3. Swing Trading
While the trend stops, swing traders usually start to play.
At the end of the trend, price volatility is usually formed in the market before a new trend forms. Swing trader buys or sells when volatility happens.
The key is to buy from the price swing low and exit on the price swing high and vice versa.
To be able to do that, swing traders apply various methods so they can identify where the previous swing ends and when the next one begins. They often create a formula based on technical and fundamental analysis. The algorithm of swing trading requires a one-way market or the opposite way. A market with a limited range or sideways is risky for a swing trader.
Here are the complete considerations:
| ✔️Pros | ❌Cons |
| Swing trading aims to capture shorter-term price movements within a broader trend | It can be more prevalent during times of high market volatility |
| Compared to day trading, swing trading requires less time and constant monitoring | Holding positions overnight or over the weekend exposes swing traders to potential risks such as unexpected news events, earnings reports, or geopolitical developments |
| Swing trading can be less stressful compared to day trading as it involves holding positions for a few days to weeks | Emotional and psychological challenges |
| Swing trading offers the potential for higher returns compared to long-term investing | Timing and execution risks |
4. Scalping
Scalping is one of the fast trading strategies applied by active traders. Scalping includes exploiting many gaps in price caused by the spread of bid/ask and order flow.
This strategy commonly works by making spreads, or in other words, buying on the bid price and selling on ask price to get the spread between two price points. Scalpers try to hold their position in a short tempo, as well as reduce the risk related to that strategy.
Additionally, a scalper doesn't move with big volumes, but they try to take chances from small movements in a small volume. Because the benefit per transaction is small, scalpers prefer to trade in a more liquid market.
Unlike swing traders, scalpers like a stable market that's not easily influenced by sudden price movement. That is in order to get more spreads from the bid/ask price.
Scalpers are also required to focus on factors such as lot size, price fluctuations, leverage, and familiarize themselves with any broker terms that could potentially impose restrictions on their scalping activities.
Lastly, here are the pros and cons of scalping:
| ✔️Pros | ❌Cons |
| Quick profits | High transaction costs |
| It can reduce the risk of significant adverse price movements during longer holding periods | Traders need to dedicate a significant amount of time and focus during trading hours, which may be demanding and limit other activities |
| Reduced overnight risk | The fast-paced nature of scalping can lead to increased emotional pressure and potential psychological strain |
| Scalping allows traders to take advantage of small price fluctuations and market inefficiencies that may be unnoticed by longer-term traders | Susceptibility to slippage and market noise |
| Scalping targets small price movements, which may limit the profit potential per trade |
Conclusion
Active traders can apply one or several styles above. Before deciding to use them, risks, and costs related to each strategy should be considered.
There are some reasons why active trading was done by professional traders. It reduces the cost demanded by securities companies in relation to the high-frequency transaction and it ensures better execution for each transaction.
Forex brokers with low commissions and better execution are two elements that increase the benefit potentially from trading.
4 Comments
May 3 2014
Hi Silvana, nice share....
I used to use scalping but after I learn forex deeply, I start to use daily strategy. I think day trading is the most suitable for my daily activity.
May 24 2014
There are a lot of things we need to consider for learning in this market but the most important tip is price action, price is the leading tool which can tell us the market behaviors so that we can trade in the context of price movement after that money management is also of great importance in the world of trading in the forex market.
Jun 3 2014
Price action trading involves the study of historical prices to develop technical trading strategies. Price action can be used as a standalone technique or it can be used with indicators. The rationale is rarely used; however, it is not unheard of as economic events as substantive factors.
As mentioned above, there are several other strategies that also fall within the scope of price action. Price action trading can be used in different time periods (long-term, medium-term, and short-term).
Nov 14 2022
Based on these four categories, I mean as the author said these four trading styles are most commonly used by traders in the market :Forex, Crypto, Stocks, Commodities. And what I got from your article is that I can see that the whole style is a short term trading style, except position trading. If we compared to stocks, I think forex is more profitable than the stock market. This means that the stock market can only profit when it is bullish. And many traders/investors use long-term trading in the stock market because of that, right? But what about forex trading? Is it possible if I learn Position trading in Forex? Because I have very little time during the day and previously it said that position trading was daily to monthly, so I found a position trading that works for me. as note I work 6 days as a salaried worker, 9 hours a day + 4 hours part-time job, from 7:00 a.m. to 9:00 p.m.