What Type Of Trader Are You?

Trading style is one of the most difficult questions traders face when entering any market, especially foreign exchange. With certain pairs offering great long terms gains, while other pairs offer volatility that intraday traders can only dream of. While the actual volatility of the forex market is very low, forex's volatility for the average investor is usually very high due to the enormous amounts of leverage available. A currency can move 100 basis points, or "pips," in a single day, mutliplied many times over by double-digit leverage. Compared to the equities market, for example, forex volatility is usually very high for the individual investor.

Two of the most important factors when determining your trading style are understanding of one’s exposure to risk and time commitment.

Day Trading (Intraday Trading) usually consists of positions opened and closed within a single trading day and primarily focused on locking in quick profits rather than long term gains. Since the profits are generally smaller, consequently the risk is also smaller. It also offers traders a certain “rush” or excitement when trading constantly as apposed to trading on a long term basis with fewer positions. Since most positions are constantly monitored, traders run into little risk of unexpected changes or volatility. As a result, intraday trading helps a trader be better informed about the market and its movement. Furthermore, trading on a day to day basis helps a trader understand what to expect in certain market situations, thus, better adapting to the market.

As with any type of trading system, there are many negative aspects to day trading. Since most traders are executed and closed within a short time period, the profit size is greatly affected by the spread. If the spread is too large, the profit margin by might minimal for the trade. Day trading can also result in the trader involving his or her emotions in the trade, making it almost close to gambling. Constantly trading can result in the trader making decisions based on emotions rather than thought. However, the most challenging aspect of intraday trading is money management. Traders have to be extremely disciplined in knowing where to cut losses and where to exit with profits. Money management, or more important making smart decision with the funds, is often the key aspect to being a successful intraday trader. Lastly, intraday trading is very time consuming and traders should be willing to allot themselves completely to a single market (US Session, Euro Session, or Asian Session) and must limit themselves to that market only. It is very important to choose one market to prevent oneself from being completely burnt out due to the extreme exhaustion and stress that a trader might have to deal with throughout the trading session. All in all, Day trading requires constant attention and is highly, but it offers the “rush” that most traders seek.

 Example:

Swing Trading is a style that usually consists of a trader holding on a position for a span for 2-30 days and base most of their trading ideas on trends, reversal patterns, and technical analysis. Candlestick charting, Elliot Wave Theory, and Fibonacci Levels are all extremely useful tool commonly used when swing trading. Swing trading requires a trade to be extremely aware of recent high and lows in the market to better understand the trend and possible reversal points. As a result, spreads tend to have less of an impact on positions. In addition, the profit and losses are manageable and often tend to involve many stop loss and limit orders. The biggest advantage of swing trading is the ability to make profits while not being completely committed to monitoring positions with the use of orders.

It is extremely easy to get emotionally attached to a trade once a position begins to earn profits. Traders must be extremely disciplined in determining what their profit limit and stop loss is before entering a position. It is widely known Limit orders and stop loss orders are not only the life but also determine the success of a swing trader. In conclusion, swing trading involves more technical and fundamental analysis, and might be more geared towards advanced and intermediate traders.

Example:

Long Term Trading (Trend Trading) involves buying or selling a pair based on its current trend patterns. This can range any where from days to months to years. In most cases, trend trading often involves a pair that pays out a positive roll. (Pair with Positive Interest) Traders using this style must limit themselves to less than 2% margin due to high price fluctuations that might occur over a long period of time. (Low Leverage) Most dips and spikes can be absorbed in the market and the current trend is must be the only focus of the position. Equity traders often enjoy long term trading in the Forex market since most of the rules and principles used can be easily applied to both markets. In addition, Trend trading involves less stress and less time commitment. It is often easier to predict a long term trends of a market or economy than it is to predict its daily movement. In general, most traders believe long term trading is more profitable than swing or day trading.

One of the negative aspects of Trend Trading is holding onto a trade through tough times. Traders should not exit positions due to overnight retracements or sudden price changes. It is extremely important to believe in the current position and ignore current market movements. Lastly, due to the significant time required before seeing any profits, traders could feel frustrated and experience significant draw downs during the wait. 

Example:

All in all, choosing your style of trading can be the most important factor in determining one’s success as a Forex trader. I believe the Forex market truly incorporates all trading styles in the most evident and vivid manner. However, In order to gain complete real time experience with these styles, it is best that one opens two or three foreign exchange demo accounts and incorporates each of the styles to determine which suits them the best.