The financial market is such a unique place that people have to do things in their own way to get their desired results, which is why there are different types of trading styles — scalping, day trading, swing trading, and position trading.
But new traders find it difficult to choose, from the different trading styles, the one that suits their unique personality.
While understanding your trading personality and choosing the style that suits you best can be difficult at the initial stages, it is very necessary for your long-term success.
As you know, trading the financial market is a journey, and you should aim for long-term success rather than making quick bucks trading erratically.
One way to ensure that you are on the part of success is to understand yourself and trade in a way you are comfortable with.
That is why, in this post, we will explore the different trading styles and how to choose the one that suits you best. But first, let’s understand how trading styles are different from trading strategies.
What are the different trading styles and how are they different from trading strategies
Trading styles are a classification of trading methods based on how long a trader can leave his trades before closing them.
If trades are closed within a few minutes or hours after opening them, the trader is said to be practicing short-term trading, which could be scalping or day trading.
Traders who close their trades after a few days or weeks are said to practice medium-term trading (swing trading). If the trades are held for several weeks, months, or years, it is considered long-term trading.
From the above, you can see that trading styles are different from trading strategies, even though most people use the two terms interchangeably.
Trading strategies are techniques developed by traders to help them find an edge in the market. They mostly involve specific ways of using technical indicators and price action patterns to find trading opportunities in the markets.
Trading style, on the other hand, tends to involve the personality of the trader, which is what determines the timeframe he trades and how he executes his trading strategy.
A trader who likes to take things slowly and think them through before making a decision will definitely find it difficult to effectively execute his strategy if asked to scalp the market.
Also, if a trader who likes the excitement and pulse of fast-paced markets is asked to use a position trading style, he will find it difficult to follow his trading plan, even when given the most profitable strategy.
So, it’s obvious that when a trader uses a trading style that does not suit his personality, effectively executing his trading strategy becomes a serious problem.
The chances of making trading mistakes — such as missing trade setups, jumping the gun, shifting stop loss, and many others — become high.
On the other hand, using a suitable trading style makes it easier for the trader to comfortably execute his trades and stick to his strategy for a long time.
Why are there different trading styles?
The reason is simple: each trader is unique, and no two traders think alike. We all have different personalities, which make us react to the same situation differently, and of course, our different personalities manifest in the way we trade the financial markets. If you give a team of traders the same rule-based strategy, the outcome would likely be different for each person.
While some people like to take several small profits from short-term trading, others like to make huge profits from a few long-term trades, even if it means losing several trades before hitting the big winner. Thus, the different trading styles are a result of our different personalities.
The different trading styles
As we stated earlier, there are four categories of trading styles:
- Day trading
- Swing trading
- Position trading
Now, let’s take a look at them one by one.
This is the fastest style of trading a trader can adopt, as trades only last from a few seconds to a few minutes and rarely up to an hour.
Being a fast-paced trading style, scalping is associated with a highly intense and stressful trading atmosphere that is only suitable for people who can comfortably make trading decisions in a split of a second.
Those who adopt this trading style are called scalpers, and they can make up to 30 or more trades in a single day.
Sometimes, it may even be more than 50 trades per day as scalpers often get in and out of trades within a few minutes.
As a result of the stress involved in such high-frequency trading, most scalpers tend to use trading algorithms — which are intelligent software that scans the markets, identify good trade setups, place trade orders, and manage the trades.
For traders who trade this style manually, they analyze the markets in the lowest timeframes, especially the 5-minute and 1-minute timeframes.
They also make use of the tick charts, which are not time-based but rather print a price bar whenever the specified number of transactions has been reached.
Scalpers make use of different approaches in their trading, but most of them employ technical analysis methods in finding trading opportunities and managing their trades. Those ones often make use of different combinations of oscillators and momentum indicators that don’t lag the price.
However, some scalpers are inclined to fundamental factors and mostly trade during new releases to benefit from the increased volatility that is associated with such periods.
These ones often anticipate the kind of impact — positive or negative — an economic data can have and position themselves for the news release, and they are very fast in getting out of their positions once they are in profit or cutting their losses if the price is going against them.
Since scalpers are always trying to capture small profits, they typically use a good deal of leverage so as to multiply their profits — but this can also magnify their losses when they lose.
With the huge volume they trade and the size of their profits, scalpers are liable to high trading costs. Thus, for scalpers to stay profitable, they must use strategies that have very high win rates (>80%) — that is, they must have far more winners than losers.
In addition, owing to how cost can easily add up quickly, scalpers need to trade with brokers that offer the lowest possible spreads and commission rates if they are to effectively implement their trading style. If care is not taken, trading costs may take up far more than half of their gross profit.
In spite of all the challenges, scalping is still profitable for individuals who have the right personality to effectively implement a profitable strategy in a fast-paced environment.
However, the scalping world is now dominated by high-frequency trading firms that place hundreds of trades daily with the help of trading algorithms. If you really think that this style is right for you, it’s probably good to look for algos.
Just like scalping, day trading is a short-term style of trading, but unlike scalpers who enter and exit their positions within a few minutes, day traders are looking to open and close their positions within the same day. So, they stay longer in the market and typically make use of higher timeframes.
While day trading may not be as fast-paced and stressful as scalping, it still requires watching and analyzing the market all day and making quick trading decisions, such as when to open a position, how best to manage the position, and when to close a position and cut your losses or close a position in profit.
Day traders can stay in a trade for as short as 30 minutes to as long as several hours or even the entire trading day, as they try to capture the main price swing of the day.
While the price naturally swings up and down in the intraday timeframes — just like in any other timeframe — a day trader aims to capture the predominant swing of the day.
On average, day traders normally place about two to five positions each day, but that depends on a lot of factors, such as the number of markets they are watching and market volatility.
A day trader who is watching more markets is more likely to get more tradable opportunities than someone that is monitoring a few markets. Also, the more volatile the market is, the more price swings they get in a day.
Of course, day traders make use of the intraday timeframes, especially 1-hour, 30-minute, and 15-minute timeframes.
They often look for trading opportunities on the 1-hour timeframe and step down to the 15-minute timeframe to find better entries.
However, some of them still check the daily timeframes to identify some key price levels and the broad market perspective.
The majority of day traders are technical traders. That is, they make use of technical analysis tools and techniques in finding trading opportunities. However, a few day traders focus on fundamental news releases and only trade during the period of high-impact news releases.
One of the most prominent benefits of day trading is that the trades are not exposed to overnight or over-the-weekend price gaps since the positions are closed before the end of each trading day, unlike swing and position trading where trades can stay open for many days, weeks, or months.
However, day trading has a number of disadvantages, and one of them is cost. Though not as high as that for scalping, which involves several more trades and smaller profit per trade, the cost of spreads and commissions can quickly add up for day traders too, especially when compared to swing traders.
And you know the reason — more trades and smaller profits per trade, which increases the cost of transaction as a percentage of profits.
Apart from cost, another shortcoming of day trading is the high capital requirement, especially for stock traders. About $25,000 minimum deposit is required to start day-trading stocks on the American stock markets. Swing traders and position traders don’t have to start with that amount, even for a margin account — this requires only $2,000.
Swing trading is a medium-term style of trading where traders try to trade the individual price swings (which is where the name ‘swing trading’ came from) in a trend or ranging market mostly on the daily timeframe.
While many swing traders make use of technical analysis, some use fundamental analysis, and others use both technical and fundamental analysis.
For a trending market, most swing traders trade only the impulse waves and stay out of the market during pullbacks, but sometimes, swing traders also fade the impulse move (trade the pullback), especially when it is coming against a strong support or resistance level.
Some of the strategies used by swing traders include buying the dips in an uptrend and selling the rallies in a downtrend, chart pattern breakouts, and mean-reversion strategies.
In a ranging market, it is normal to trade both price swings — upward price swings and downward price swings.
They trade the upward swings from the lower boundary of the range and the downward swings from the upper boundary of the range. Trades are closed before the price reaches the opposite boundary.
Swing traders usually make use of the daily and 4-hourly timeframes. They look for trading opportunities on the daily timeframe and step down to the 4-hourly to find better price levels to place their orders. Sometimes, swing traders also check the weekly timeframe to get a better view of the trend.
These sorts of trades often take anywhere from a couple of days to a few weeks, and since trading happens on the higher timeframes, you don’t need to watch your screen all day.
Checking on the market for a few minutes at the end of each trading day is enough. Thus, swing trading can be combined with other activities, including taking a full-time job.
Swing trading offers several benefits: first, by earning a living from somewhere else, you can take care of your bills, which reduces the burden on your trading capital and frees you from the “quick money syndrome.”
So, you are trading with a relaxed mind and are less likely to make account-blowing mistakes, like not cutting your losses short or chasing a trade.
In terms of frequency, a swing trader typically places about 8 to 10 positions a month, depending on the number of markets the trader is monitoring and how much trading setups that occur in that period.
As a result of the less frequency of trading, the cost of trading is lower. Moreover, each swing produces an appreciable number of pips, thereby reducing the percentage of profit paid for spread and commission.
Aside from the reduced trading cost, other benefits of swing trading include better quality trade setups and better use of leverage.
Obviously, trade setups that occur on the higher timeframes are more reliable than the ones that occur on the lower timeframes. For example, a triple top or head and shoulder pattern on the daily timeframe is more likely to yield a successful outcome than a similar pattern on a 30-minute timeframe.
On the aspect of reduced leverage, swing trading requires a bigger stop loss than day trading. This effectively forces you to trade a smaller lot size, thereby using smaller leverage.
Using less leverage reduces your potential loss in the event of an adverse market reaction (price gaps). Since swing traders leave their trades over the nights and weekends, they are at a higher risk of price gaps.
This is also known as position trading, and it lasts for the longest period, up to several years. But most times, the trades range from a few months to a couple of years.
Traders who follow this style often try to ride the long-term trend to its completion, rather than trading the individual swings in the trend as swing traders do. So, they are position traders are known for being very patient.
Many position traders are simply investors who use fundamental analysis to determine the right assets to buy and hold for a long time.
However, some real traders prefer trading for the long term and make use of a combination of fundamental analysis and technical trading tools or even use only technical tools.
On the fundamental side, these traders try to ascertain the value of the asset and its potential for growth over the long term.
Having established that, they use technical analysis methods to determine the right time to enter the market. Some of the technical methods they use to time the market are breakouts of important price levels or market structures, such as chart patterns and boundaries of a range.
Position traders are normally concerned with higher timeframes, especially the weekly and daily timeframes.
The aim is to identify the long-term trend and find good price levels to enter their positions. They often analyze the trend direction and key support and resistance levels on the weekly timeframe and then step down to the daily timeframe to spot better entry levels.
But that’s not the only thing you should consider if you are trading the currency market: the trades are held for longer periods, so unless you are operating a swap-free Islamic account, it is important to not be on the wrong side of the swap.
You should aim to trade in the direction that you can earn interest from the swap. Thus, when making your final analysis, aim to buy the higher-yielding currencies and sell the low yielding ones.
There are many benefits to using this style of trading. One of them is that it does not take much of your time. You don’t get to spend most of your time watching the market.
It is perfectly safe to just glance over your chart at the close of the market to know how your trades are going, while you use the weekends to search for trading opportunities.
Thus, with this style, trading becomes a part-time business, and you have all the time to earn more income from elsewhere, which will put you at peace and allow you to execute your trades without pressure.
Another benefit is the lower cost of trading due to less trading frequency and higher profit potential per trade. Although there may be more losers than winners, a successful trade can make you more than 1,000 pips.
On the downside, position trading offers fewer trading opportunities and lower win rates — no matter the strategy you are using. In addition, there is the issue of overnight price gaps and sudden price reversals wiping out your profits.
Choosing between the different trading styles: how to know the best trading style to adopt
New traders often find it difficult to know the right trading style to adopt. But that becomes easy if you consider these two factors:
The time you have for trading
The amount of time available to you for trading plays a huge part in the type of trading style you should adopt.
For instance, if you are a busy person with the usual 9-5 job but want to trade the market for some extra income, you won’t have the time to monitor and analyze the market all day long, so scalping and day trading are already out of the options unless you plan to deploy a trading algorithm.
If, on the other hand, you want to go into full-time trading, you have all the time to watch your screen all day. So, you can consider day trading and scalping styles.
Your personality matters a lot when it comes to the trading style to adopt. If you like working in a high-pressure environment and can comfortably make effective decisions quickly, at the heat of the moment, then, you can look towards day trading or scalping.
But if you are the type who likes taking time to think things through before arriving at a decision, consider using swing trading or position trading style. Remember, it is important you trade the way you feel comfortable with so that you can effectively implement your trading strategy.
Trading styles are a classification of trading methods based on how long a trader can hold a trade before closing it.
The different trading styles include scalping, day trading, swing trading, and position or long-term trading. To know the style that is suitable for you, consider the time you have for trading and your psychological makeup (trading personality).