When it comes to forex trading, every trader has his or her unique style of trading that fit their different personality type. Choosing the wrong trading style can hurt your ego and your account too. Whether you are a beginner or an experienced trader, you need your style to enjoy maximum trading benefits. Traders are not and will never be the same. Even those following the same rules of trading brings out different results. This paper expounds on nine trading styles that fit your personality. But first, you need to understand what forex trading is.
What Is Forex Trading?
Forex trading is also known as forex exchange. It refers to the process of converting one currency to another. Forex is one of the most traded platforms, with an average volume of five trillion dollars. Forex trading, like any other form of exchange, requires self-reflection before starting. It brings out your profile as the trader, which is your personality. The kind of trading style you use needs to fit in your profile for maximum benefits. The strategies include the following:
1. Trend Trading
This trading style aims at capturing returns by analyzing the momentum of assets in a particular direction. The term comes from the movement of prices in one direction called a trend. It could be up or a downward shift. It is a popular trading style. Here, you identify the movement before choosing entry and exit points. Most of these traders join the trade for a long position in an upward direction. With an uptrend, you tend to experience higher swing highs and swing lows. As a trader, you can still opt to enter a short position with a low trend. When you join a downtrend, you experience lower swing lows and lower swing highs.
The basis of joining a trade is on the position of the currency price and the relative trade strength. Traders who use this style rely on recent trends to determine the movement of costs and the best area to set up a trade entry and exit. You can use different tools to evaluate trends like a relative strength indicator, stochastic, measurements of volume, and indices. Trend traders also watch for chart patterns like triangles or flags that show the potential continuation of a trend.
2. Day Trading
Day trading is the style of forex trading that involves buying and selling within the same day. In most cases, day traders borrow cash to make the most of the small price movements in high trading indexes or liquid stocks. These traders use the same techniques used by long-term investors. The trick of this style is buying low and selling high but in a compressed period. Day trading is not investing. With the long-range investment, a trader buys a stake in assets with the hope of building a profit. This style of trading is suitable for traders who prefer starting and completing the trade on the same day. It is a short-term trading style, where you have to close the deal before the day ends.
Traders who practice this style are the kinds who have sufficient time during the day for analyzing, executing, and monitoring trades. If you find other strategies like swinging to be slow for your lifestyle, then day trading is the best option. In most cases, individuals who go for day trading are unable to sleep in the night, fearing that price movements may affect the ongoing trade. If you choose to be a day trader, you need to stay informed on the current fundamentals events essential for choosing a direction. You also have to ensure that you remain alert to monitor the trade.
3. Swing Trading
This style of trading is more of a fundamental training where you open a position and leave it for a couple of days or weeks without causing an interruption. The style involves making changes in the fundamentals for the open days. These changes aim to make maximum returns from the changes in the medium-term market. It explains why the trade is more fundamental. You can hold any positions for several weeks, depending on your requirements. Keeping it over-night is available at a cost.
This trading style is compatible with individuals who have enough patience to wait for long trading periods. But once such trading profiles enter the market, they have haste in becoming profitable. In most cases, such traders hold it the trade overnight. So, it is not the best option for individuals who become nervous when a deal is on hold while away from their computer. This trading style is known as the best option when it comes to forex trading for beginners willing to venture into the exchange market. Even with online forex trading courses, it is the simplest and helps beginners to master the mechanisms behind market prices. The stop loss for swing style is more significant than that of day trading style.
So, it is crucial to keep calm when a trade seems to go against your expectations. The maximum amount of time a swing trader can hold is three weeks. During this period, the trader keeps checking the highs and lows of stock changes in the market. This style also offers excellent trading potential to both intermediate and advanced traders.
4. Position Strategy
This trading style is a long-term trading style that plays over a specific time. It could be days, weeks, months, or even years. Here, trading strategies depend on long-term macroeconomic trends. Traders operate on smaller trade sizes and low levels of leverage while expecting to profit on higher price movement over an extended period. Position traders find fun in the long trends and responsiveness to resistance areas and critical support of the forex market. It is the most extended trading style in the forex exchange for the last several years. The method is for the ultra-patient traders. It also needs a higher understanding of trading fundamentals for maximum profits. It requires you to invest time and money to realize a sizeable return.
Traders aspire to invest in pricing trends by entering and remaining in the market for an extensive-term. Position traders give less concern to pullbacks and market price fluctuations. Instead, they focus on capturing the bulk of the trend that lasts for a long time. Research is crucial before joining the market. Once the trader decides on the selected asset, they enter the trade and monitor their position occasionally. Since the trader is least concerned with minor price fluctuation, they spend less time in maintenance.
5. Carry Trade
This style involves borrowing money at a low-interest rate in assets that give high return rates. The trader converts the amount borrowed into another currency. The amount is only accepted if it has a higher interest rate than the original amount. You can also position the proceeds into assets such as commodities, stocks, real estate, or bonds denominated in the other currency. In short, carry trade augments gains by taking advantage of the difference in currency rate between countries. The held money pays the trader the interest rate of the country from which you bought the currency. Traders profit from the difference in the currency of low-interest rates and another country offering a high-interest rate. Traders have to make sure that the interest earned and the difference in the currency prices complement each other.
Although this style contains a significant potential return, it has risks involved. A sharp decline may occur in the price of the assets invested. The trading style has the potential of implicit exchange risk. Sometimes the funding exchange may differ from the borrower’s currency. The possibility of currency hedge happening is high. Hedging imposes additional costs in case the currency contracts the lock in exchange for a time in the future. Carry trading style is competent with traders who are not afraid of taking risks. Carry trading can negatively impact the global economy in case of an abrupt change of the economic environment and speculators forced to unwind their trades.
6. Reversal Trading
This style involves the turning of a market price trend, with a definite high or low and a directional move against the set price action. It is the falling of price from an absolute high marked by an uptrend. Reversals can be difficult to identify during a formation. However, they are easily recognizable after developing. Below are the two types of reversal style of trading:
- The upgrade. It is a series of higher highs and higher lows. Here, the reversal starts at the absolute high and involves a price action trending downward, establishing different periodic lower highs and lower lows.
- The downtrend. It has an exhaustion point at a low price value. Reversal starts at the absolute low, and has an upward trending price action, developing various periodic higher highs and higher lows.
The foreign exchange market tends to change direction daily or weekly. A reversal can occur suddenly within a short period. After, it may take days or weeks before developing. For any market to experience a setback, it needs a rise in the participation and imbalance in the demand and supply. As demand rises, prices increase too, as sellers dominate the order flow, the price falls.
Scalp trading is a popular trading strategy characterized by short periods at the opening and closing of trades. This style of trading is held onto for a few seconds to a few minutes at the most. Forex scalpers enter the market to grab small amounts of pips as often as they can throughout the day. A trader looks to open and close a trade within minutes. Traders take advantage of the small prize movement with high leverage. It is easy to take note of the profits and losses because of the fast-moving trading strategy.
Traders formulate an opinion of how the market outcome is likely to be for instant results. This style of trading is popular among people because smaller trading moves happen more frequently than larger ones, almost in all markets. A scalper benefits from these movements. The trader places several trades in a single day, seeking for many small profits. They close all positions. This trading style is the right choice for traders willing to spend several hours of undivided attention on trading. It needs you to focus intensely and think quickly for successful trades. Only a few people can handle such a demanding and fast trading style.
8. Range Trading
Range trading involves identifying currencies that are overbought and oversold and selling during the resistance periods. You can implement this style at any time. It proves to be most effective when there is no direction in the forex market with a discernible long-term trend.
Range trading proves to be at its weakest during a trending market, especially if there is a lack of accountability for a directional market bias. Range traders have the notion that prices can hold within a predictable range for some time. The traders depend on the ability to buy and sell at predictable highs and lows. Sometimes the prediction is over one or various sessions.
9. Momentum Trading
This trading style involves traders buying and selling based on the strength of the current price trends. It is no different from physics momentum whereby the multiplication of mass and velocity determines whether a particular object continues on the same path. In the forex, various factors determine momenta like the rate of price changes and the trading volume.
Traders believe that asset price moving actively in a particular direction continues to move in the same direction until it loses strength. Similarly, a weakening movement is a clear indication that a trend has already lost power that may cause a reversal. This trading style considers both volume and prices, and mostly use the examination of graphic support like candlestick and oscillators. You can determine a momentum over a more extended period of days, or within a week-trading time. The first step in momentum trading is determining the direction of the trend you are willing to trade. You can then establish an entry point by using one of the momentum indicators.
The forex market has something for everyone willing to join the exchange market. Any trader can join as long as they are familiar and comfortable with the above styles of trading. It doesn’t matter the personality or the kind of lifestyle you have. When selling, it is vital to learn how to control emotions. It can make a difference. You also need to have a trading goal. The styles in this article should help you become a more refined trader. Trading is a lifestyle, and the only way to excel is through discipline ad consistent practice.