What is it that separates a great forex trader from one who never quite reaches the same heights? While intelligence, timing and gut instinct are all prerequisites to be an excellent forex trader, there’s something all successful traders must do: find a trading style that’s the perfect fit for their personality type.
In ‘7 Tips for Successful Forex Trading’, we touched on how important it is that traders know themselves and find a strategy that complements their innate strengths and weaknesses. In this article, we’re going to go one step further, by defining the different types of traders in financial markets to help you find a trading style that suits you.
Scalpers are traders who take short-termism to an extreme. They typically hold onto a position for anything from a few seconds up to a couple of minutes before moving on. Their objective is to make a very small profit on as many trades as possible throughout the day. While this helps to reduce the risks, as the short time they hold a position limits their potential losses, they do have to make the right decisions time and time again.
The scalper trading style requires tight spreads and liquid markets. That means traders tend to focus on major currency pairs such as GBP/USD, EUR/USD and USD/JPY. Such quickfire trading can be stressful and hugely time-consuming, as traders have to constantly monitor the latest price movements. For that reason, it’s best suited to those who have made trading their full-time profession.
A swing trader takes a longer-term view than the scalper, as they typically hold their positions for anything from a few days to several weeks. That allows them to make bigger profits on each trade and also reduces the time they must dedicate to monitoring their trades throughout the day. This makes it a popular trading style for those with other commitments, such as a full-time job.
Swing traders tend to rely on technical analysis of the markets, rather than the macroeconomic and geopolitical factors that have more of a long-term effect. For that reason, swing traders must have an in-depth understanding of the themes that impact foreign currencies and the patience to time their moves very carefully to optimise their results.
Of all the different types of traders in financial markets, position traders take the longest term view. They hold their position for anything from several weeks or months up to years. Given that approach, position traders are not concerned with short-term price swings based on daily economic news. Instead they rely on weekly and monthly price action analysis charts to understand how the price of a security moves over the longer term.
Position traders take what can best be described as an academic approach to forex trading. They bet on sweeping geopolitical and macroeconomic themes and rely on fundamental and technical analysis to make better trading decisions. Given their long-term view, position traders are not active traders. Instead, they take just a few positions a year and use every last piece of information available to make their decisions.
Algorithmic traders use complex formulas and mathematical models to help them make decisions about when to buy and sell currencies. The automated algorithms they use can be coded by the trader themselves or purchased commercially. They aim to remove the potential for human oversight and rely instead on back- and front-testing to fine-tune their strategy.
Algorithmic traders typically enjoy technical analysis and have a high level of interest and trust in technology. Ultimately, they believe the use of technology will reduce the inherent risk in forex trading and allow them to form exit strategies that allow them to secure large, long-term wins.
An event-driven trader is one who tries to capitalise on volatility spikes in forex markets caused by macroeconomic and geopolitical events, such as elections, monetary policy announcements and the release of economic statistics. They seek to profit from the temporary price swings that result from such an event before the market has time to readjust.
Event-driven traders must keep up to date with world news and have a keen interest in and understanding of the wider impact of major events. That means event-driven traders must dedicate a significant amount of time to researching the issues that could have an impact on currency prices, and have the confidence to make decisions based on their interpretation of events.
Find the Right Trading Style For You
Which of these forex trading styles sounds like the right fit for you? If you’re not sure DailyFX has created the DNA FX quiz, which matches your personality type to the most appropriate trading style. However, it’s important to understand that, regardless of the trading style you use, there’s still no guarantee of success.