Choosing a trading style which suits your personality is very important if you want to become a successful trader. There are numerous approaches you can apply when you trade online. However it is quite likely that you wouldn’t feel comfortable using all of them. Most people are comfortable with one or two. Take some time to learn the differences. Try couple of trading strategies in different styles on a demo account. Only then you will be able to tell for sure which trading style suits you best.
Buy-and-hold is the most passive trading style of all. It is usually the choice of people who see trading mostly as long term investment, rather than a short term speculation. A typical trade usually lasts for couple of years or longer. Due to the long periods of holding the positions it is considered to be the least riskier. However it is also the approach with least profit potential. It works best for people who don’t want to spend too much time analyzing the markets. It can be profitable when there are strong up-trends in the markets, but performs very bad in periods of consolidation or bear markets.
Position trading is very similar to buy-and-hold. However it requires more attention and action from the trader, so it is not so passive. Additionally the traders can be long or short. This is the choice of people who want to feel more engaged in the markets, but still prefer to be on the investment side. Position traders use long term chart time frames – daily to monthly to look for opportunities and hold their positions from couple of weeks to couple of months. Due to the long term of the holding period, position traders usually use trend following strategies.
In trend following strategies the traders are looking for trading opportunities in instruments forming a pattern of higher highs or lower lows to determine the direction of the trend. In these strategies the traders wait for a bullish or bearish trend. After the direction is established, they enter the market and hold their positions until the trend breaks. Following the trend can be a very rewarding, low engagement strategy. Unfortunately it doesn’t perform well in periods of reversal or consolidation.
Long terms strategies work best in trends. Once the trend breaks, it is time to switch your trading style. Trends never reverse overnight. Usually there is a period of volatility and sharp turns before the new trend is formed. This period open a lot of opportunities. However you need to be actively engaged in following the markets in order to succeed.
Swing trading is the best trading style for the reversal periods. Swing trades can be held from couple of hours to couple of days, but not as long as in trend periods. The swing trading style is very suitable for algo-trading.
This is the most active trading style so far. Day traders usually hold their positions from couple of minutes to couple of hours and never leave positions open overnight. A typical day trader makes dozens of trades during the day. Day traders rely on charts and technical indicators for their trading decisions. The short repetitive patterns are also suitable for automation and algorithmic trading.
The other trading styles need time for the positions to develop, so the trader trade along his regular job. In contrast day trading is so engaging, that it is a full time occupation.
There are two major types of entry setups which the day traders follow – break out or mean reversal.
Scalping is the most active trading style of all. It is a variation of the day trading. It usually involves exploiting price anomalies and possibilities for arbitrage. Scalpers hold their positions for a very short period of time. They don’t try to find large price moves like the once around news announcements. Rather they take advantage of small, but repetitive moves which occur frequently.
Since the profits are small, scalping is only working in liquid markets with low transaction costs. Quiet markets are the best for scalping. Most of the scalping trades are done by algos nowadays. This is because computers more efficient than humans following the small repetitive tasks.