To be a successful trader, one needs to find a trading style that suits him or her. There are many trading styles, but there is no objective answer as to which is the best one. It should simply match a person’s trading experience and appetite for risk. A trading style is just a set of rules and procedures to follow to determine entry and exit points, and how to manage the trades.
Traders who search to exploit small and short-period price changes are the ones who employ scalping as their trading style. The basis of this method is to take profits quickly without a lot of exposure. The mission of a scalper is to enter a position for a short time period, as short as five minutes maybe, in search for exploitation of any adverse price movements and subsequently to exit that position swiftly. Traders who use scalping usually don’t follow forex market news closely.
A scalper’s success can be enhanced with a good knowledge of the trading platform that he or she uses. This knowledge is essential for the ability to setup ‘take profit’ and ‘stop loss’ orders to speed up the exit position. Scalping is not for the faint hearted. This method will suit a trader who does not mind the pressure, and is in search of a fast trading environment. The trader will find that the aim is for small gains within a day, and that leverage is useful for taking quick profits out of small price movements. A person who likes a fast-paced and energetic environment, but can’t afford large investment amounts would find that scalping could be a suitable style.
Trend trading is a style used by traders looking for the next price trend. Even though they can search for short-term trends, these traders usually search for longer term trends on 1-hour or 4-hour time frame charts to be sure that a trend is established and it’s there to stay for a while, or maybe because they are so busy they can’t stay around and trade using smaller time frames. With the help of trend indicators such as the Moving Averages they decide on a trend, and they enter a position with the view that the trend will continue.
Trend trading implies that one can choose to analyse short-term trends, or go for a longer term strategy. In this style, trend traders do not gamble on market movements. Instead, they identify the establishment of a trend and stay in their position until they have evidence that the trend is reversing. To do this they use trend indicators to help gain confidence on the establishment of a trend. Fundamentals such as central banks news and economic indicators have the power to impact the trend of a price, and so trend traders keep a close eye on market and general news. This style would suit a trader interested in a long term or a short term strategy who is a blend of a technical analyst, with an eye on the fundamentals and know what’s happening in the markets.
Position traders are not usually interested in short-term price movements or fluctuations, but they prefer studying big macro-economic trends in order to find the long term moves that can often describe a market for years. Therefore, they take longer term positions and they stick with them for weeks, or even months with the view of earning high incomes.
The main characteristic of position trading is keeping positions open for long periods of time. Any daily price movements should not be of concern because of the long term scope of the trade. High capital is important because these types of strategies are for the long term. Traders will have to survive big short-term price movements against the position. High leverage is not recommended because adverse price moves might damage the position easily. Macroeconomic research and fundamental analysis are very important because they can tell which way the price is likely to go over a long time. Position trading would suit a person with preference in long-term strategies, and the funds available to absorb the turbulence of short term price fluctuations during long-term positions.
This is not the full list of trading styles, there is a bigger selection of methods tried and worked by market participants over the years. Even though some styles have ‘fixed’ requirements, it is entirely possible to adjust some parameters of a trading style according to a person’s preferences such as time availability, risk appetite, and funds available. A trader is able to customize a style to his or her needs, or even create a blend of trading styles and check if it works. The important part here is, once a style is established, stay loyal to it.
This article has been contributed by David Parker, investment advisor and marketing consultant for http://www.easy-forex.com.
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