Types of Trading

Trading Styles

Difference of behavior, mindset and mental attitude led the human towards diversification even in the same field. In Forex Trading, this rule did validate itself and resulted in different types of trading styles. Some of the well-known common trading styles are:


Day Trading

This trading style refers to opening and closing positions within the same day. The markets do not fluctuate much over the course of a given day relative to their movements over longer periods of time. Therefore, day traders will look to use as much leverage as possible to magnify their exposure to those market moves that they can find. Most day traders treat market speculation as their full- or part-time job. They see trading through the lens of a daily employment regiment, punching in at the beginning of the day and closing out any positions at the end.

It is worth noting however that day trading, being a fast moving, highly challenging trading style may not be for everyone. Should decide that day trading is for you, then there are also many different styles and variations of day trading with the currency market that you may wish to sample before choosing the form that feels right for you, or maybe you will prefer to utilize a series of styles.


Position trading

Trader who, take a long-term, buy and hold approach. Run their trades for number of days even weeks and more. A position trader can be compared to a squatter who sets up a tent in the middle of a crowded shopping mall, letting people pass by and stare but remaining relatively untouched by them until the authorities come in to shoo him off.

Since position trading involves staying in one position for more than a day, unfavorable market conditions rarely phase traders who use this trading strategy, unless they continue for more than a couple of days. Of course there are risks involved with staying in one position for so long, but the risks are less than those experienced by day-traders, who have to enter and leave the market many times in a day, leaving too much opportunity for mistakes. One disadvantage to position trading is that any changes that occur overnight or after hours can result in a serious financial loss. However, because of the constant fluctuation in currency values, the same magnitude of value change can occur in the other direction as well, allowing the trader to realize a higher profit during hours when most day-traders are asleep.


Scalping

Scalping involves making dozens or hundreds of trades a day, trying to scalp a small profit from each trade by exploiting the bid-ask spread. Scalping works because not all stocks remain on the move at all times. Scalpers generate profits from these non-moving stocks or turn around and sell for a profit those stocks that fluctuate in the positive direction. This way, they receive a small profit. This profit quickly adds up. It takes lot of stamina for performing numbers of trades. Normally 1-minute chart is used for Scalping.



Swing trading

Traders who can react quickly to market changes, including at-home and day traders, benefit from swing trading, which is a trade strategy that involves holding a position for longer than a day. If a trade seems to be going sour, swing traders can exit the market before losing too much money. Swing traders usually maintain a position for 3-10 days, taking advantage of any positive swings in the market. They flow with the market, taking little trades here and there. Most swing traders have an interest in the trends of stocks rather than fundamental values, although it has often been said that swing trading is a variety of fundamental trading. In fact, swing trading sits squarely in the middle between day trading and trend trading in terms of the length of time invested in a position. These traders stick around just long enough to see how the wind will blow before deciding to stay and see a trend through or go on to more profitable pastures.


Mechanical trading

Mechanical trading system is often touted as the end-all to Forex trading. Traders choose a system to follow and enter it into a program that will then pick starting and stopping points for trades as well as maintain a position, without requiring a trader be present to control those actions.

Implementing a mechanical trading system can be the best decision a Forex trader can make. However, it can also be hard for those traders who work off of emotion. The idea of putting future profits into the hands of a computer program can be a scary situation, however, with free platforms available now, it is a limited-loss system: a computer program won't ride a trend just to see it plummet in the end, and a program can't get cold feet and sell too early.

As an automated system, a mechanical trading system is a good all-around program to keep in the background. Whether a trader wants to implement a break-out system, reversal, indicator or trend-following system, there are plenty of options available.


Discretionary trading

Discretionary traders rely on their intuition to decide when to enter or exit a market. While other trading methods emphasize the reading of signals based on formulae or patterns, discretionary trading involves using subjective experiences. They are the polar opposite of the mechanical trader.

Because discretionary trading is based on intuitive reaction, it is best suited to those traders who feel comfortable relying on their gut-feelings to tell them when to buy or sell. Many traders can make large profits by jumping on profitable position changes quickly. But there are also disadvantages to using this kind of trading system. Discretionary traders may end up making a great profit with their trades, but without using a formal system, there is no way to backtrack to find out how they succeeded, so there's no way to repeat the process.

Even without having a fool-proof system, discretionary trading can be very profitable, while at the same time offering traders the flexibility and control to jump in and stop a trade that appears to be going downhill or modifying a bid to maximize profit if it appears that a trade value is increasing.