Choosing a forex trading style can be difficult. Here we provide a detailed description of the 4 most common trading styles and the secrets of finding which one is the best for you.
It's normal for new traders to experiment with all trading styles before they find out which one fits their lifestyle and funds. But in the end, they will end up with only one or two trading styles that suit them the most. How do we find the right trading style? Before delving into the secrets of figuring it out, let's learn the differences between the four most common trading styles.
Swing trading is a style where traders hold a trading position for over a few days or even weeks. Usually, they aim for intermediate-term trading opportunities. This is different than long-term trading where traders hold positions for weeks and even months.
Swing traders normally use higher time-frames to determine support, resistance, and trends. They also use 4-hour charts for patterns and entries. Although they might use the 1-hour chart for entries.
There are a few characteristics of Swing Traders:
- They use both fundamental and technical analysis.
- Swing traders use wider stop losses in order to provide more space for the price to move up.
- They mostly use lower leverage.
- They aim for a bigger price target, so they tend to wait longer for trade to develop.
If you want to be a swing trader, you need more funds in your account. This is because you have to stay in trades longer and you need more margin to do this.
Traders who use scalping as their go-to forex trading style are called scalpers. This trading style's main goal is to achieve profits from small price changes.
Scalper does this by opening and closing a large number of trades in one trading day. They aim to catch as many small wins as they can.
Due to the nature of their trading style, scalpers often enter and exit the financial market in a short time frame. Usually, it's a matter of a few seconds or minutes with a maximum of few hours. They tend to use higher levels of leverage.
Scalpers are less likely to suffer margin calls and risk fewer funds per trade. They typically use two kinds of indicators, Momentum and S&R or Support and Resistance.
Some examples of Momentum indicators are:
- MACD (Moving Average Convergence Divergence)
- Stochastic Oscillator
- RSI (Relative Strength Index)
While some examples of Support and Resistance are:
- Pivot Points
- Moving Averages
- Keltner Channels
Scalpers can be determined by these characteristics:
- They use technical indicators to determine trading strategies.
- They make decisions on lower time-frames.
- They usually wait for support and resistance levels to find setups with the highest probability.
Some traders think that day trading is similar to scalping; both trading styles take place within one trading day. Ultimately, their goal is to find the best opportunities of the day.
However, day trading normally opens one setup a day, and not more than a couple of trading per day. Day traders often hold a trade for several hours but not more than one full trading day.
Day traders use classical indicators such as MACD, RSI, and Price Action. They use candlestick patterns to determine trends and support & resistance. Some traders also use charts and wave patterns to understand the overall price structure.
Characteristics for day traders are:
- They wait as the price moves up and down multiple times a day, whether it is in line or against their position.
- Day traders wait for the price to reach major decision spots on the chart.
- They use leverage with lower ratios compared to scalpers.
- Day traders usually try not to exit a trade too soon in order to avoid turning the trade into a scalping setup.
Besides those three, there is one more forex trading style called Position Trading.
Some traders think that Position Trading is just a regular buy-and-hold strategy instead of active trading. However, in the hand of experienced traders, position trading becomes active trading.
This strategy uses longer-term charts such as daily, weekly, or even monthly. Normally, traders combine this strategy with other methods to determine the market trend.
Usually, position traders follow the trends to enter the market and get out of their positions when the trend ends.
Now you know the four most common forex trading strategies. The next question is how you can choose the best trading style?
How to Choose the Best Forex Trading Style
Answering these questions can be a little tricky. In the end, it all depends on you as a trader. The best trading style may vary from one trader to another. Their personality, skills, and experience play a bigger role here.
Let's say you want to be a scalper, you need skills that require you to engage with financial markets using the scalping technique. This might need some time to develop.
For beginner traders, day trading and swing trading can be reasonable options. These forex trading styles require less experience and skills
compared to scalping.
However, before you decide which style fits you, try to answer these questions first.
- What are your goals? Are you looking for extra income or do you want to be a full-time trader?
- How much time do you have for entering, managing, and exiting market positions? While swing trading requires less time, day trading and scalping might not.
- Which style makes you feel most comfortable? Do you like fundamental analysis or technical? Do you prefer pattern trading, price action or
If you're still unsure which forex trading style fits you, try to do some of these steps:
- Open a separate demo account to try all the trading styles, try to test them for a week or two.
- Write down your impression while using each trading style (what you like about it? What are the disadvantage? What are the problems and solutions? etc).
- Compare the notes you write about them, you can consult someone with more trading experience if you're unsure.
- Evaluate and see how this style is working for you.
Trying these styles by yourself might be the best way to find out what style matches your trading psychology. Plus, it can be fun to test different forex trading styles with a demo account to recognize what you like or dislike.
After learning about all these forex trading styles, you might wonder what style is safer? Or what style brings you more profit?
Some people argue that swing trading is safer than day trading. Arguably, swing trading has less risk since you make fewer trades than a day trader.
But, it does not necessarily mean day trading is not safe. The most important thing for you to do is to avoid over-trading . You need to understand how margin and leverage work in your favor.
Speaking about profit, some people might say that the more trading opportunities you get, the more profit you can gain.
For example, if you trade in a 1-hour time frame, you might make more transactions than trading off the daily time frame. But it's all depending on the elements of your overall trading plan.
In conclusion, it is hard to decide which forex trading style is the best of all. But what you need to do is to find one that fits all your needs and ability.
Besides these forex trading styles, there is another trading strategy you can try such as the breakout trading strategy. You can read about it in Breakout Trading Strategy For Forex Traders.