Online Trading or Forex trading has take the world by storm with many people learning to trade the financial markets from the comfort of their homes or where ever they have a internet connection. But is it as easy as they make out and can you make your monthly wage in a day? Before we get into the money side of trading what you need to think about is what type of trader you want to be. Are you able to leave your job right away or do you have the trade as a side hustle before going full time? There are 3 main types of trading styles and the time frame that is traded will determin which type of trader you are deistined to be. The three most popular classifications of a trader’s preferred method and time frame are Day Trading, Swing Trading and Position Trading.
Ask yourself the following questions…
Which style of trading do you prefer? Long term, Short term, Medium term?
Which method is riskier and more rewarding?
Which method is more stressful.
Do you have patience? If not start learning…
Each method has its own advantages and disadvantages and what you should bare in n mind that all markets are fractal in nature and that the same patterns play out on every time frame. Thus, the discussion about these styles is not about the pattern identified to enter or exit the trade, for the same patterns exist on all time frames. Rather the defining attributes of each method are:
Trading frequency…How much do you want to trade?
Duration of trade… How long do you want to hold the trade?
Time frame used to identify a trade
Day Trading (or Intraday Trading):
Day traders typically enter and exit trades on the same day. Most day Day Traders like to be in and out of the markets so trading the lower time frames is how they find their set ups. Some day traders will enter multiple trades or mulitple currency pairs within the same day to maximise their profits. There are 3 main sessions in the forex market and it is known that the most volatile times are during the crossovers from each session and it is here that the day traders look to capitlise on these quick moves within the markets. In terms of money management, they generally have smaller profit targets and stop losses, and thus can afford to trade with larger lot sizes. Because of the frequency of trading, day trading necessitates more time and focus on trading: the day trader is spending a lot of time actively participating in the market, much more so than the other two styles. To be a good Day trader you need to be quick thinking to adapt to changing market conditions and this can be highly stressful on most traders especially new traders. The pressure to make money and live the lifestyle
Day Trading Pros
Less market exposure – They dont have to worry about market crashes or news spikes following wild news whilst they have been asleep or away from the charts.
Faster profit potential: Your profits can accumulate the first day of trading.
Faster compounding of profits: Due to the frequency of trading, compounding can dramatically increase overall profits.
Because of smaller stops and targets, higher leverage and lot sizing can be used to increase dollar size on winning pips, which can build the account faster.
Day Trading Cons
Spreads have more impact on overall profitshence the more trades the more commission you have to pay to your broker.
Faster loss potential: the potential to lose your money is far greater as your stops are usually tigher and most day traders tend ot over trade or end up revenge trading when it goes wrong.
Faster compounding of losses: Due to the frequency of trading, if you are not letting your trades ru to target or getting stopped out alot you can deplete your account super fast.
Time intensive: if you have a family or job or other time commitments, it can be difficult to stay focused and trade properly.
Speed & concentration can make day trading very stressful.
Real life distractions can be problematic: You go grab a coffee or to take shit and the news spikes have stopped you out.
Swing trading is typically a short to intermediate term trend following system lasting anywhere from a day to a weeks. Swing traders are looking to initiate a couple of trades per week rather than per day. Swing traders will look for the direction of the trend on the higher time frames and then enter on the 1H to 4H time frames. Their stops can be a little larger giving their trades time to breath if some volatility comes into play. Risk to Reward can be pretty good with 1:3 as a minimum but good swing traders will hit a 1- 6, 7, 8 R2R. Now another popluar aspect to swing trading is compounding your trades by adding to your position after heach swing high or low. Given their larger stop loss relative to day traders, swing traders would probably trade with smaller lot size to minimize the risk. They don’t need to spend as much time glued to the screen, or need to react quite as fast, but they do need to be just as smart, disciplined and focused.
Swing Trading Pros
Good risk to reward ratio.
Spreads have less impact on overall profits.
Less time intensive: because you are not trying to make frequent trading on small time frames, you have more time for other things. You can have a regular job and spend 2 hours a day setting up your trades.
You dont have to rush your trades and this is alot less stressful
Swing Trading Cons
Greater market exposure
A steep learning curve to swing trade successfully.
You still have to devote at least a couple hours per day in analyzing the markets to determine or modify a position.
You still need good discipline and emotional fortitude.
Position trading, also known as ‘trend trading’, generally these traders buy or sell and hold for as long as possible to get as many pips as they can. Positions can be open for a few weeks to a few months. Position Traders look for the direction of the trend on the Monthly and Weekly charts before looking for entries on the daily and 4 hour charts. Trades are also held during periods of minor retracement with the expectation that they will eventually continue trending in the desired direction. Once again and similar to swing traders the stops are based on the previous swing high or low, or at points of previous support and resistance on daily chart. Usually a position traer will use a trailing stop loss.
Position Trading Pros
Best risk to reward ratio. You would be shooting for much larger profits relative to your loss especially if you sniper in on swing entries but have position targets.
Spreads… yeah they have nothing on your account
Least time consuming: You can spend more time with the family or on another business venture.
Least stressful: You are not under any time pressures and can jsut monitor and adjust your trades each week.
Position Trading Cons
Greatest Market Exposure: You are in the market alot longer and any major economic crash could effect your acocunt.
You dont keep up with market knowledge or economic data which will stop you progressing as a trader.
Traders can become psychologically committed to the trade or trend direction. Because you have a few trades and long lasting ones, you can experience an emotional attachment to one trade or a direction that might prove to be false and short-lived.
One thing to keep in mind is that the markets are risky no matter which discipline you choose to follow but it all boils down to your character, your time and your outlook. Do you have the time to sit in front of the charts and scalp or day trade? Will the pressure get to you if you have a few losing trades and end up revenge and over trading? Do you want to spend more time with your family or doing something else you love? Are you in a full time job that takes alot of comittment so you just do not have the time to trade as much as you would like? Ask yourself these questions and be sure to check the pros and cons of each again and then right down your pros and cons. All methods require discipline and emotional fortitude. All systems, in order to be good, need well-defined stops and take profits. If you back test and forward test ( more of that in another article to come ) your strategies you will have a better understanding of the markets and will inevitably be more confident and comfortable.