4 Types of Trading: A Brief Analysis

Trading styles are differentiated into four main groups:

1. Position trading
2. Swing trading
3. Day trading
4. Scalping

The purpose of this piece is to take a closer look at these four styles and discuss the good and bad in each to help new traders decide the one they would like to go for.

Instead of comparing pros and cons as is done often in analysis, we will focus on what each trading style offers and the effort required by the trader.

Position Trading

 What it is

Position trading is the most long-term out of the four. A position trader will keep a trade open for months, or even years.

Since they trade long term, they focus on the bigger picture. For this reason, fundamental analysis is the main type they will employ. Keeping an eye on the news and global economic structure and trying to understand it is at the heart of position trading.

They don’t usually look at daily or hourly charts. They are more concerned with weekly or monthly price charts.

What it offers

• Bigger profits. One can make anywhere between 500-1000 pips on average.
• Less amount of time investment daily.
• Less stress compared to short term trades.

 What it requires

• Clear thinking on the trader’s part. It requires the trader to understand how economies work because this is the closest thing to the stock trading, in terms of investment. In stock exchange, one invests in a company’s future. In forex you’re investing in a country’s future. So in order to make the right guess and consequently earn profits, one has to be sure about the fundamentals of economics and currency.
• It is easy to get panicked if things seem to be getting out of hand or to become impatient when the trend seems to be moving sideways and not much is happening.
• Faith in one’s strategy. It is an offshoot of the above point. You have to believe in yourself and your analysis of the situation enough to stick to the plan.

Swing Trading

What it is

In terms of time, this comes after position trading and is medium to long term. Swing traders will hold a position anywhere from a couple of days to a couple of weeks.

Swing traders use both technical and fundamental analysis methods. Since a swing trade might end in a couple of days, they are able to take advantage of the shorter moves too if they mean to.

They will usually use daily charts.

What it offers

• Good profit margin. Usually over 100 pips.
• Less stress, as the trader is not required to continuously keep an eye on the charts. Usually checking once or twice a day should suffice. Therefore, people who have days jobs will find this kind of trading easier to manage.
• The research behind swing trading doesn’t have to be as vigorous as position trading.

What it requires

• Big stop losses, since you have to leave some room for fluctuations. Some people don’t like the risk involved.
• Patience
• The willingness to stay for the long haul

Day Trading

 What it is

This is the most frequently adopted trading method. It is short term trading. Day traders will hold a position from a couple of minutes to a couple of hours. The goal is to exit before the day ends, to avoid rollover.

Day traders will usually employ technical analysis for trading though some may also use fundamental analysis.

Day trader use hourly or minute charts.

What it offers

• A decent number of trades per day
• Average profits per trade. Usually they will range from 20 to 50 pips.
• With medium range profit, the risk is reduced too. Therefore, the stakes are not too high in day trading.

What it requires

• In day trading it is advised to watch the charts as much as possible while a trade is open.
• Grip on technical analysis. One should be able to decipher chart and candlestick patterns if they want to be able to read the signals which will help them make the right decision.
• The mindset that is ready to take a fresh start every day. With day trading every day is a new journey and will look different because the trader is not keeping any of their trades open overnight. So you need to have initiative enough to start anew every day.

Scalping

What it is

Scalping is an extremely short term trading method. Scalpers hold a position for a couple of minutes at a time. Sometimes they may even enter and exit within seconds.

Scalpers will just look at charts and take advantage of small fluctuations using aspects of technical analysis.

They use minute charts for this purpose.

What it offers

• The ability to make the highest quantity of trades. Profit per trade might only be a few pips, but since the frequency of the trades themselves is high, the overall profit can reach close to what a day trader makes per day.
• The freedom to not have to worry about the bigger picture. Scalpers are not concerned with economies or what is making or breaking them. Their only concern is the few seconds that will make them a couple of pips.

What it requires

• Decisiveness and speed. One cannot be confused or double minded in scalping. Throughout the trading process traders are required to take quick decisive actions. That is the entire strategy. Therefore, in order to be a scalper the trader will have to embrace the thrill.
• In scalping the trader has to be glued to the charts. There is no time to rest.
• The ability to develop strategies on your feet. Of course, they do not have to be elaborate plans, but you will definitely need to be able to switch bias, adjust your initial notions, and develop a sharp eye for chart analysis.

Now what you need to do is carry out a self-analysis and list your strengths and weaknesses. Then compare them to the requirements of these four trading methods to get a clearer understanding of which one will be best for you.

Good luck!