What’s a Trading Strategy?
You may have heard maintaining discipline is key to becoming a successful trader. Equally as important, though, is having a well-reasoned and back-tested trading strategy.
A trading strategy is an organisation of rules, covering all aspects of entering and exiting the market. However, this is all but one section of an overall trading plan. A complete plan includes things such as a money-management strategy, a detailed list of currency pairs to focus on, times to trade and risk-management measures.
Trading strategies are based on either technical analysis or fundamental analysis, or a mixture of the two, usually verified through rigorous historical and forward testing. For the purpose of this article, the spotlight will be on the technical side of the market.
Personality and time constraints play a key role in determining which style a trader should explore. Four main trading styles exist:
- The scalper
- The day trader
- The swing trader
- The position trader
The scalper seeks multiple brief, profitable, opportunities in a day.
If you’re more comfortable predicting the direction a currency pair is headed in the next 10 minutes than you are forecasting direction in the next 10 days, you are perhaps a scalper. Scalping often involves lengthy periods of screen time, difficult for those who have full-time jobs.
Scalpers look to capture, in short timeframes, the first stage of a move or pattern. Further adding to this, scalpers typically have a healthy account size in order to generate worthwhile profits in small moves. As such, the scalper style may not be a suitable approach for every type of trader.
The day trader is a watered-down version of a scalper. Positions are opened during the trading day and are usually liquidated before the market close. The main objective of a day trader is to take advantage of small price movements in highly-liquid markets. The more volatile the market, the more favourable the conditions generally are for a day trader.
Comparing the scalper, who can initiate 10 or more trades in a day, Forex day trading activity may only consist of one or two trades each day, using timeframes ranging from the 5-minute up to a 15-minute scale (a scalper will likely be focused on the 1/3-minute timeframes). Day trading requires healthy patience and generally long periods at the screen in order not to miss favourable trading patterns or potential breakouts. Again, not a style one should be looking at if you have full-time obligations.
Both the scalper and day trader tend to be driven by daily results.
The swing trader is considered a patient individual, content that trades may last for several hours, a few days or even a few weeks. Unlike scalping or day trading, this style suits those who have full-time jobs and those who dislike the idea of several hours behind the screen.
Most swing traders think long term, focusing on quarterly results. According to swing traders we’ve interviewed, swing trading alleviates the pressure to make money on a daily or weekly basis.
Swing traders also tend to enjoy the analytical side of trading on slower timeframes (H1 charts and higher), using a mix of high-probability patterns and indicators.
The position trader, on the other hand, thinks long term, similar to an investor. If you’re a position trader you may look at the screen once a day. Most, however, will open their platforms only a couple of times a week to check on current trades, or execute fresh positions.
Trades in this category tend to last long periods of time (months or even years in some cases if the conviction is strong). Short-term movement carries little weight in the eyes of a position trader.