At the beginning of your trading quest, you will be faced with a searing psychological question. As you look at yourself in the mirror, you will need to ask yourself the most quintessential question.
Who am I…. as a trader?
This is not the voice of some unexpressed existential angst. This is the critical first step on the long road towards realizing an important truth of trading. That in order to maximize your success in trading, you need to create a system that harnesses your skills and protects you from your weaknesses.
The first way to understand who you are as a trader is to know what type of market analysis makes the most sense to you? The best way to do this is by looking at the different types of traders and seeing which style fits with your trading outlook.
Scalpers trade the smallest time frames looking for small changes in currency prices. Scalpers take small profits by doing quick in an out of trades, sometimes using the spread to give them their profits. This method can be applied to the market at any time and is low risk due to the small profits or losses at play. This can be a disadvantage as the volume of trades is critical for successful scalping.
It is possible to trade as a scalper using fundamental or technical trading techniques. Some traders trade on news using the volatility to advantage, whilst some trade on volumes, charts, breakouts, etc.
Day traders are one step up from scalpers in terms of length of trades. Their modus operandi is to undertake a trade that will not be held overnight. The type of trading strategy varies between day traders, since the trading time frame allows for a variety of styles. With its focus on shorter-term trends, it does not allow for long term positions and more volatile instruments that need longer time durations in order to realize profits.
This method is good for 9 to 5 trading, as a trader can take stock of their profits within a day. It prevents potentially costly overnight swap charges, which can eat into profits over time. Since the trader is looking to take a good profit in a relatively short time frame, it tends to favor stocks with more volatility, and unlike scalping, each position can show significant profits or losses, giving it a higher risk. However, since a variety of trading methods can be used, it gives greater scope for trading strategies to be implemented, albeit on a short time frame.
Swing traders hold positions for over one day in an attempt to capture price swings or continued trends in the market. This method often uses technical indicators like moving averages and momentum signals to identify trading opportunities. Since the positions can be held for several weeks, the analysis shuns short timeframes and focusses on longer time frames to give an understanding of the market direction. Because of the longer holding time, there is a potential for opportunity risk in a position that doesn’t move or the potential for ongoing losses as well as significant ongoing profits. Risk can be somewhat mitigated with stop losses, but a trader has to be careful not to stop out a good medium-term position with a stop that is too restrictive.
Position traders are the longest term traders, the buy and hold specialists. These could be long or short positions using long term technical indicators, long term trends or market fundamentals to determine the position. The long term can leave the trade exposed to significant risk and it is not uncommon for a position trader to wait for significant market corrections that may never end up occurring.