Every trader at some point of time profiles towards a certain trading style. This is a very individual decision, the result of experience, knowledge, trading time, decision making approach, psychological profile, etc. Having your own trading style means having clearly defined investment strategy.

It can be said that there are as many trading styles as there are traders. However, we can draw up a conditional categorization. On the one hand, there is the way of making an investment decision (e.g., technical or fundamental), and on the other hand – the time frame in which the strategy is executed.

Scalping

This trading style attempts to profit from high number of quick trades. Trading positions are closed within seconds or minutes. Some aggressive traders make dozens or even hundreds of trades a day. A large number of small profits must offset losses and trading costs. Since the price target and stop order are extremely close (a few pips), the strategy implies the use of significant leverage.

“Scalping” follows clear rules for opening and closing positions, which are usually based on technical criteria (signals from indicators and oscillators).

The strategy is often applied around a key news story or event, which implies increased volatility (sharp market movements). However, high volatility creates high risk and is intentionally avoided by some scalping sub-strategies.

Some scalpers increase or reduce their exposure under certain circumstances. For example, when a position moves in their favour by a few pips, they double the size. In other scenarios, they will reduce the exposure. It is common to go from a long position to a short one within seconds. So scalping trading is extremely dynamic by its nature.

When scalping, the bid/ask spread cost must be taken into account, which can be substantial given the high number of transactions. In a volatile market, this spread usually widens. The technical execution of the order also brings a challenge: opening or stopping orders may be skipped due to slippage (quotes are changing at large price intervals skipping expected trade price).

For these reasons, scalpers trade mostly highly liquid currency pairs such as EURUSD or USDJPY when the US and European sessions are open (the most liquid period in the day). Choosing a broker that quotes attractive spreads (usually ECN brokers) is of determining importance.

Nowadays, scalping is increasingly executed automatically – by predefined algorithms. Thus, the emotional side is partially eliminated and the trading time and risk of making technical errors are significantly reduced.

Day trader

“Day trader” is a definition of a time slot rather than a trading style. This strategy is in many ways similar to scalping. Trades are fewer in number, but often amount to several per day. Positions are held open longer, but do not remain open overnight.

The short-term nature of these investments implies relatively short stops and profit-taking targets. In these circumstances, leverage is often used to increase trading potential.

Trading costs (mainly bid/ask spread) are significant due to the large number of trades. This directs day traders to highly liquid currency pairs during the most active trading sessions. The relevant “low cost” brokers are chosen.

Many day traders seek the momentum effect of a risk-on (high-risk assets appreciate) or risk-off (low-risk assets appreciate) market sentiment. The trader tries to “carve out” a share of the existing trend.

Trading around key events is also common practice. When the market is volatile and movements in a particular direction are fast and sharp, favourable opportunities are created for day traders.

Technical analysts often develop intraday strategies. Most often, positions are opened in synchrony with the main trend visible on a daily or weekly chart. Traders analyze shorter time frames (minutes and hours) in search of familiar continuation patterns (e.g., price channels). Familiar configurations allow the systematic application of money management rules. Usually the reward/risk ratio is 2:1 or more. Less frequently day trading strategies are countertrend or range.

Some traders make several trades simultaneously. In these situations, the relationship between these positions should be assessed. If the correlation between them is high, the danger of all positions moving in an identical manner is present. Different limits can control the risk of excessive losses on individual positions and the total risk of the entire portfolio.

Swing trading

This trading style implies holding an open position longer than a day, but no longer than a few weeks.

Swing trading can follow purely technical rules or be combined with fundamental analysis. It is often used for stock trading, where certain information (such as corporate reports) is consumed by the market within several trading sessions.

Most traders prefer to trade in synchrony with the underlying trend. Their goal is to hook up with that movement for a few days, following strict money management rules. Some range and reversal strategies are popular around swing traders as well.

The appropriate time frames for technical analysis in this trading strategy are the daily and 4-hour price charts. At lower time intervals, entry point, price target and stop order can be specified.

Good planning of trading costs is necessary. Spread costs decrease relative to more aggressive strategies such as day trading, but rollover costs may increase.  

Range Trading

Markets move in trend about 20% of the time, and the other 80% there is no clear direction. Range-trading is primarily a technical trading style and aims to make profits when prices consolidate. These are periods of balance between buyers and sellers.

Reaching support levels is an opportunity to buy (and close existing short positions) and approaching resistance levels is an opportunity to sell (and take profits on long positions). A range will be exploited until a breakout disrupts the pattern.

Like any strategy, this one has its imperfections. Forming a clear range takes time. Most traders want to see at least two bottoms and two tops forming the lower and upper boundaries of the movement. By this point, much of the consolidation may have already taken place. Also, the presence tops and bottoms does not guarantee that they will not be broken by a few pips (the so-called false breakout), thereby widening the range.

However, hitting stops is normal for this trading style. Range-trading allows a high reward/risk ratio. Stop-loss orders usually are placed close to the opening price (below range support on buys and above range resistance on sells), and the price target is situated far away at the other end of the consolidation.

Different oscillators are often used to better filter an opening and closing trades. If the oscillator signals an oversold condition near support, it may be time for a long position. If the oscillator signals an overbought condition around resistance, it is probably time for a short position. Take profits will be placed around the opposite side of the range.

Long-term positioning

This trading style involves long-term position management, sometimes exceeding a year. The investor (the word trader seems inappropriate for such a time frame) performs a thorough analysis of the economies representing the two currencies. Monetary policies and macroeconomic forecasts are usually on focus.

Long-term positioning implies a greater tolerance for adverse price movements. A few figures in the opposite direction are quite natural.

The idea of long-term positioning is copied from the traditional portfolio management, where the “buy and hold” strategy is particularly popular. Its concept is that stocks as an asset class should appreciate over time. In theory, passive investing minimizes trading costs (spreads and commissions) and should achieve higher returns than active trading.

Currency trading is somewhat different in its genesis from the stock market. Since each pair reflects the performance of two economies, prices cannot move in one direction indefinitely. Their price behavior is rather mean reverting – the pair tends to revert to its median values.

However, a currency pair can move in trend for months or years. It is these movements that long-term traders seek to capture. Typically, they combine several FX pairs in a portfolio, aiming to achieve a certain risk profile. The positive effect of diversification allows risk reduction while maintaining similar return expectations.

Investment decisions under this strategy are most often made through fundamental analysis. Technical levels are usually associated with the setting of stop and take-profit levels.

This strategy is often applied to pairs with a positive rollover rate, which is an additional income to the expected price change gain. It is suitable for people who have limited time for forex trading and are looking for a long-term analytical approach of investing.

Carry Trade

When a position remains open overnight, the broker automatically charges a positive or negative rollover rate. This rate reflects the difference in the interest rates of the countries from the traded pair. If the annual interest rates in Australia and Japan are 5% and 0% respectively, a long AUD/JPY position (buying Australian dollar and selling yen) should yield an annual income of 5%. A short position in the same pair (selling Australian dollar and buying yen) will cost 5% per year.

In practice, carry traders takes a loan from a country with a low interest rate, through which they buy the currency of a country with a high interest rate. If the pair stays at the same prices for a year, the income will be equal to the interest rate differential. This effect can be magnified using leverage. Of course, losses can also increase quickly.

Carry trade strategy implies open positions for months or years. It usually works well in periods of sustainable global growth (risk-on).

Traders need to choose well the currency pairs in which to invest. They strive not only for interest income, but also to achieve a positive result from a change in the exchange rate.

Given the nature of this trading style, monetary policy is the focus of fundamental analysis. The prospect of further interest rate increases is of great importance. The expectations of an Australian interest rate rise to 6% will theoretically increase the demand for AUD.

However, when times get more turbulent and the market goes into a more defensive (risk-off) mode, the corrections in these pairs can be very sharp and lead to rapid losses. For example, low-interest currencies such as the yen are considered safe-haven. If global risks increase, a large volume of capital will seek security in Japan.

In the carry trade strategy, the Japanese yen is often the sold currency of the traded pair. The BoJ has kept interest rates around zero for decades in an attempt to stimulate economic growth and inflation. In turn, the currency being bought should generally carry a high interest rate. This is especially the case for emerging market currencies. Their central banks are forced to maintain high interest rates to compensate investors for the high risk.

Prior to the 2008 financial crisis, this strategy was widely implemented through long positions in AUD/JPY and NZD/JPY. Australia and New Zealand have traditionally maintained high interest rates, and on the other hand, they are developed economies that are more stable. However, over the last decade, interest rates have remained very low even in the developing countries, which has reduced interest in the carry trade strategy.

In the real world, the overnight rate set by brokers does not accurately reflect the interest rate differential. When implementing this strategy, a broker that offers an appropriate rollover rate should be selected.

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