eToro – Forex Trading Forum

[djsheckie]

I’ve found that often people speak about three main types of trading here on the forum so I thought I’d clarify the three different types. Actually there are really more than just three different styles but most of them essentially boil down to these three broad categories which are: Day Trading, Swing Trading, and Trend Trading.

Day trading is generally the most discussed, and seemingly the most popular so it seems like a good choice to start with.

What is Day Trading?

Day traders usually complete both purchases and the sales of currency pairs within a single trading day. Obviously since your trades are completed during the day you don’t have to worry about what might happen to your trades overnight which is a huge relief, and one of the main appeals of day trading. Why should it matter if trades extend overnight?

[djsheckie]

The upside

Well it depends what time zone you’re in but with Forex trading around the clock there could be major financial events hitting that completely change the face of the market while you’re busy sawing logs. This puts traders who hold trades overnight into a somewhat risky position where they could lose their profits, or incur greater losses while they’re away and unable to make necessary changes to their strategy.

The other advantage that day traders have is that since they follow the markets so closely they’re able to jump in and out quickly and thereby maximize profits and minimize losses as they occur. Whereas long term traders must simply ride out these fluctuations and hope for the best.

[djsheckie]

The downside

One of day trading’s greatest flaws is the higher trading costs generated by the numerous transactions. Since day traders are involved in a number of trades each day they have more spreads to cover, and as they generate more trading costs they need to earn greater profits than do traders who deal in long term transactions.

The other obvious downside to day trading is the sheer amount of research, time, and concentration needed to keep up with a lighting quick market. Day traders have to commit a lot more time to staying in front of the screen, staying up dated with current trends, charts, and news as it happens. They’re also much more at the mercy of the computer, and internet connection since if it goes down they could stand to lose a lot more money than a long term trader.

[djsheckie]

Still why should day trading be the most popular type of trading? Aside from the aforementioned positives and negatives mentioned day trading is the best known and most documented method. So being a relative newbie it's a lot easier to start as a day trader since there's so much more information available on this particular style.

Unfortunately it's also popular with some people because it can become almost like gambling since there's lots of fast action and quick gratification. However, those who look to Forex for a thrill should be warned as they stand to lose a lot more money than they'll gain if they are simply trading on whims and fail to use any sort of logic or analysis. Forex is a complex and sophisticated market and doesn't just simply run on lady luck as many would wish.

So that pretty much wraps up the basics of day trading - stay tuned for more on swing trading, and position trading. :)

[djsheckie]

So, we covered day trading in the last few posts, but what about the other two types? Next we’ll cover the second most popular style of trading – swing trading.

What is swing trading?

I like to think of swing trading as the Goldilocks method of trading. It's not too fast, not too slow, but juuuuust right. In other words with swing trading your positions are held over a few days, or up to several weeks in order to get larger gains so it longer term than day trading, but not nearly as slow as position trading.

Advantages
Swing traders generally feel that this style of trading combines the positives of day and position trading meaning you have the ability to capitalize on gains like day traders but at slower pace and lower transaction costs of longer term position trading.

See? Easy peasy.

[djsheckie]

The other possible advantage for many traders would be that swing trading offers a less intense trading experience than does day trading. This is due to the fact that good swing traders plan their entrances and exit points in advance and hold their positions for a longer period of time. While some traders thrive on the intensity and volatility of day trading, those who don’t and want a less stressful time trading might prefer a somewhat more relaxed method like swing trading.

This isn’t to say that swing trading is all peaches and cream though it does have a few obvious downsides as well.

[djsheckie]

Disadvantages

The greatest single disadvantage of swing trading probably has to be the increased risk incurred on longer term trades. Since swing traders generally hold positions for longer periods of time their risk per trade is markedly higher than the trades a day trader would make. The increased risk is simply due to the fact the trades are held for a longer period of time and are even held overnight which as mentioned previously when speaking about day trading opens a trader to greater risks since factors that effect the market may take hold while your away from you trades and damage your profits.

[djsheckie]

The other downside of swing trading it that while it isn’t as labor intensive as day trading it still requires more work and research than does position trading as swing traders need to follow the markets fairly closely even when they aren’t immediately entering or exiting a trade since swing trading does require forethought, research and planning.

In short swing trading offers some middle ground between day and position trading. It’s slower than day trading but is still more labor intensive than is position trading. So in the next few postings we’ll cover the third and final style of trading which is position trading.

[djsheckie]

So now we’ve finally reached our third and final style of trading. This last style is known as position trading, but is also sometimes referred to as trend trading. Position trading usually involves holding positions for longer periods of time – generally about three to six months. Why hold a position for so long? Position traders are looking to capitalize on fundamental changes in the value of the currency being traded. Since position trading is more focused on long term fundamental changes they have to research and integrate more fundamental analysis into their strategy than a day or swing trader necessarily would.

[djsheckie]

Advantages

Position trading’s greatest advantage is probably that it involves far less time trading than either day trading or swing trading. Once a position trader has spent the requisite time researching and analyzing the market, usually several hours a week, they’ll start placing their trades. Of course, since position traders are going to be holding positions for a long period of time they have to determine and then set both stop loss and take profit levels so that they can still make money and cut losses if they happen to be away during certain significant changes. Once the trades have been placed a position trader need only check in to monitor their trades and ensure that no significant factors are in play that would effect the trade negatively.

[djsheckie]

The other advantage position trading offers it’s traders is that since the trades are being held over a longer period of time, with much wider take profit or stop loss orders, the trades are much less likely to stopped to fluke movements and random noise in the market than with swing trading, or especially day trading.

Disadvantages

As was mentioned earlier when discussing both day trades, and swing trading trades which are held over longer periods of time incur much greater levels of risk per trade since markets could change and force you to exit with a loss before your profits are realized.

[djsheckie]

Position trading’s other main disadvantage is due to the fact that position traders are holding out for long term movements they often miss out on many of the shorter term opportunities that day and swing traders can easily move on and generate extra profit from. Often they miss out on these shorter term opportunities not only because they aren’t watching markets as closely to move on these short windows of opportunity but also because their trading capital is tied up in their other long term trades and not available for quick trades. Position trading requires a great deal of patience and discipline which some traders lack.

[djsheckie]

If you’re looking for excitement and volatility position trading definitely isn’t your scene.

This covers the basics of the three main styles of trading but as mentioned before these are broader categories and encompass a number of other styles which might hold greater appeal for you.

It’s also worth noting that quite often different styles work better in different types of market conditions. So, even if certain styles don’t appeal to you as much it might still be worthwhile to learn a bit more about each and add them to your trader’s toolbox so you can take advantage of other market conditions.