Main styles and methods of trading in the Forex
There are a variety of styles and methods of trading that are available on Forex. You can consider yourself a short-term trader or a long-term trader, or perhaps something close to you is close. However, these terms are usually relative.
For example, a short-term trading strategy for one trader may mean trading on 5 minute time frames, and for another trader this may mean holding the position for several days. In this post I will try to identify various styles and methods of trading, as well as to outline their main characteristics.
Manual trading and algorithmic trading
Before we delve into the various trading strategies, we must first determine the system by which the trader will execute his transactions.
When it comes to Forex trading, there are two main approaches to executing trades that a trader can use. The first approach is when a trader trades manually and uses his analysis to manage trades.
The second is an algorithmic approach to trading, in which a trading robot is responsible for trading. Here, the trader's job is to program an automated trading system and then regularly monitor it.
Choosing the right approach depends on your choice, level of comfort and psychological preferences. For example, if you always want to control all the decisions related to trade yourself, a discretionary approach may be more suitable for you.
On the other hand, if you can program and can create a trading algorithm based on your rules that will perform system transactions in the market, then algorithmic trading may be the best choice for you. If you do not have programming skills, you can order automation of the expert advisor from professional MQL programmers, for example here: https://nordman-algorithms.com/metatrader-programming/
All trading strategies that we discuss in the following sections can be either discretionary or algorithmic. Keep in mind that a discretionary trader may also adhere to a strict rule-based strategy, but he still has some discretion to make decisions. Moreover, the algorithmic approach cannot be discretionary. The EA will automatically complete all transactions using the trading algorithm.
It is important to ask yourself which approach to trading is more convenient for you and you like more, and then choose the trading style that suits you best.
When it comes to Forex trading, there are two main approaches to executing trades that a trader can use. The first approach is when a trader trades manually and uses his analysis to manage trades.
The second is an algorithmic approach to trading, in which a trading robot is responsible for trading. Here, the trader's job is to program an automated trading system and then regularly monitor it.
Choosing the right approach depends on your choice, level of comfort and psychological preferences. For example, if you always want to control all the decisions related to trade yourself, a discretionary approach may be more suitable for you.
On the other hand, if you can program and can create a trading algorithm based on your rules that will perform system transactions in the market, then algorithmic trading may be the best choice for you. If you do not have programming skills, you can order automation of the expert advisor from professional MQL programmers, for example here: https://nordman-algorithms.com/metatrader-programming/
All trading strategies that we discuss in the following sections can be either discretionary or algorithmic. Keep in mind that a discretionary trader may also adhere to a strict rule-based strategy, but he still has some discretion to make decisions. Moreover, the algorithmic approach cannot be discretionary. The EA will automatically complete all transactions using the trading algorithm.
It is important to ask yourself which approach to trading is more convenient for you and you like more, and then choose the trading style that suits you best.
Scalping
Scalping is a fast-paced trading style that can be very intense and often brings a lot of stress. Scalping involves a constant search for trading opportunities. Scalpers can often trade 20, 30 or more than 50 positions in one trading session. Most scalpers typically enter and exit the market within minutes.
Scalpers usually use a large leverage and look for minor movements that they can take advantage of. For example, a scalper trading EURUSD can trade many positions on a lower timeframe, for example, on a 1-minute or 2-minute chart, based on the breakdown of the level on the daily chart.
Scalping is quite popular in the stock market, where the price movement is more clear and less chaotic than in the forex market.
As you can imagine, one of the biggest disadvantages of using scalping is the high cost of transaction fees associated with a large number of transactions. In many cases, transaction costs in the form of commissions can be 60-70% of the gross profit of the trader. Therefore, scalpers should seek low commissions from their broker to increase their chances of success.
Today, scalpers are in serious competition with high-frequency trading using robots that can make hundreds or even thousands of transactions in one trading session. Therefore, it is not surprising that it is computer algorithms that dominate scalping and largely determine the price movement on lower timeframes.
Scalpers usually use a large leverage and look for minor movements that they can take advantage of. For example, a scalper trading EURUSD can trade many positions on a lower timeframe, for example, on a 1-minute or 2-minute chart, based on the breakdown of the level on the daily chart.
Scalping is quite popular in the stock market, where the price movement is more clear and less chaotic than in the forex market.
As you can imagine, one of the biggest disadvantages of using scalping is the high cost of transaction fees associated with a large number of transactions. In many cases, transaction costs in the form of commissions can be 60-70% of the gross profit of the trader. Therefore, scalpers should seek low commissions from their broker to increase their chances of success.
Today, scalpers are in serious competition with high-frequency trading using robots that can make hundreds or even thousands of transactions in one trading session. Therefore, it is not surprising that it is computer algorithms that dominate scalping and largely determine the price movement on lower timeframes.
Day trading
Day trading is somewhat similar to scalping, as here traders open and close their positions during one trading session. But the main difference between the two is that day traders tend to trade on higher time frames and hold their trades for a longer time than most scalpers.
Day traders usually do not enter or exit the market within a few minutes. Usually they use day trading methods and look for price fluctuations during the day that they can fix. Thus, the day trader can remain open for 30 minutes to several hours or even throughout the trading session.
Most day traders will place two to five positions per day depending on the current volatility. Although transaction costs may affect the outcome of day trading, they are not as obvious as scalpers. Also, the vast majority of scalpers tend to focus on algorithmic trading, with many day traders still choosing a discretionary trading style.
In addition to traders who focus on news trading, most day traders are focused on technical analysis. They are not so preoccupied with macroeconomic trends, as their trading style does not require long-term forecasts for several days or weeks.
To become an effective day trader, you can use a robot that will ensure that all your positions are closed by the end of the trading day. Some novice traders find it difficult to exit losing trades at the end of a trading session because they still believe that prices can reverse. Therefore, they allow a short-term daily deal to turn into a swing deal.
Every successful day trader knows that the market will open tomorrow, so they will always have the opportunity to make money.
Day traders usually do not enter or exit the market within a few minutes. Usually they use day trading methods and look for price fluctuations during the day that they can fix. Thus, the day trader can remain open for 30 minutes to several hours or even throughout the trading session.
Most day traders will place two to five positions per day depending on the current volatility. Although transaction costs may affect the outcome of day trading, they are not as obvious as scalpers. Also, the vast majority of scalpers tend to focus on algorithmic trading, with many day traders still choosing a discretionary trading style.
In addition to traders who focus on news trading, most day traders are focused on technical analysis. They are not so preoccupied with macroeconomic trends, as their trading style does not require long-term forecasts for several days or weeks.
To become an effective day trader, you can use a robot that will ensure that all your positions are closed by the end of the trading day. Some novice traders find it difficult to exit losing trades at the end of a trading session because they still believe that prices can reverse. Therefore, they allow a short-term daily deal to turn into a swing deal.
Every successful day trader knows that the market will open tomorrow, so they will always have the opportunity to make money.
Swing trading
Swing trading involves trading with a time horizon of one day to several weeks. Swing traders usually trade H4 and D1 timeframes, but can also use hourly timeframes. Swing traders choose the best trading strategies among different trading styles when it comes to trading frequency and transaction costs.
It is typical for these traders to open 8-12 positions per month, which may mean 100-150 transactions per year. From this point of view, this is a great trading style for beginners because of the large number of opportunities available to hone their skills in the market.
The cost of trading in the form of spreads and commissions is also significantly reduced in swing trading. A lower trading frequency compared to day trading and scalping combined with large take profits makes swing trading one of the most attractive trading styles for professionals.
Another important advantage of swing trading methods is that many of the technical patterns that form on these relatively higher timeframes are much more accurate and reliable. For example, the support level formed on the H4 is much more important than the support level formed on the 15-minute chart. Also, the head and shoulders figure that appeared on the H4 is more reliable than the same figure on the M5.
There are many trading strategies on the market that you can use in swing trading. You can trade on a market turn, use technical indicators like Bollinger Bands or Momentum. Use support and resistance levels, trade by trend or in consolidations. The choice of the best trading method will depend on your personality and personal preferences in trading.
It is typical for these traders to open 8-12 positions per month, which may mean 100-150 transactions per year. From this point of view, this is a great trading style for beginners because of the large number of opportunities available to hone their skills in the market.
The cost of trading in the form of spreads and commissions is also significantly reduced in swing trading. A lower trading frequency compared to day trading and scalping combined with large take profits makes swing trading one of the most attractive trading styles for professionals.
Another important advantage of swing trading methods is that many of the technical patterns that form on these relatively higher timeframes are much more accurate and reliable. For example, the support level formed on the H4 is much more important than the support level formed on the 15-minute chart. Also, the head and shoulders figure that appeared on the H4 is more reliable than the same figure on the M5.
There are many trading strategies on the market that you can use in swing trading. You can trade on a market turn, use technical indicators like Bollinger Bands or Momentum. Use support and resistance levels, trade by trend or in consolidations. The choice of the best trading method will depend on your personality and personal preferences in trading.
News Trading
News trading is a flood of fundamental analysis. News traders seek to capture price movements after news announcements using an economic calendar. Economic events, such as the number of new jobs outside the US agriculture, statements on central bank rates, inflation reports, and quarterly GDP reports, can cause increased market volatility.
When figures from a planned news event deviate significantly from the consensus of analysts, an unexpected reaction may occur in the market. Sometimes prices can rise by 150 points or more within a few seconds, and vice versa, fall by 150 points.
Trading on the news can be quite complicated and risky, since such price movements can occur in different directions, which makes it difficult to determine the true direction of the market. Strict money management rules and tight stops are a necessity for news traders because of the increased risks.
There are various trading strategies and methods that a news trader can use. Here you can trade in the forex market, use futures, stocks or options.
Regardless of the method used, it is important to note that immediately before the scheduled news events, the price of certain pairs that the report may influence is usually traded in consolidation. As the important economic report approaches, trading spreads will tend to expand, as forex brokers who create the market seek to balance their risks in order to protect themselves from potentially unfavorable price spikes.
Some news traders prefer intraday trading, in which they enter the market immediately after the news is released. Other traders prefer to wait until the market cools down a bit and wait for a pullback before entering the direction of a new trend created by the news event.
When figures from a planned news event deviate significantly from the consensus of analysts, an unexpected reaction may occur in the market. Sometimes prices can rise by 150 points or more within a few seconds, and vice versa, fall by 150 points.
Trading on the news can be quite complicated and risky, since such price movements can occur in different directions, which makes it difficult to determine the true direction of the market. Strict money management rules and tight stops are a necessity for news traders because of the increased risks.
There are various trading strategies and methods that a news trader can use. Here you can trade in the forex market, use futures, stocks or options.
Regardless of the method used, it is important to note that immediately before the scheduled news events, the price of certain pairs that the report may influence is usually traded in consolidation. As the important economic report approaches, trading spreads will tend to expand, as forex brokers who create the market seek to balance their risks in order to protect themselves from potentially unfavorable price spikes.
Some news traders prefer intraday trading, in which they enter the market immediately after the news is released. Other traders prefer to wait until the market cools down a bit and wait for a pullback before entering the direction of a new trend created by the news event.
Trend trading
Trend trading is a popular trading strategy among many futures traders and professional hedge funds. Initially, this trading style was popularized by Bill Eckhardt and Richard Dennis through the Turtle experiment.
These two traders made a bid to see if they could educate ordinary people from different walks of life in trend-following methodologies to succeed in the markets.
The results of the experiment showed that in fact traders can well be taught to be profitable in the markets. Some of the turtles have become very successful private traders and hedge fund managers.
The idea of trend trading attracts many traders. From the law of physics we know that everything follows the path of least resistance. Trading of most trend traders is long-term. They strive to focus on the daily and weekly chart in search of the most powerful movements.
The main goal of a trend trader is not to predict where the market can go, but to join a market that is already showing signs of strong movement in a certain direction. Traders are trying to enter established trends and stay in them as long as the market continues to move in the right direction.
The main difficulty that many novice traders encounter is that they enter the market too late. By the time most retail traders enter the trending market, most of the movement has probably been exhausted. Thus, the trick is to identify the emerging trend as early as possible and enter the market as close as possible to the beginning or middle of the trend.
These two traders made a bid to see if they could educate ordinary people from different walks of life in trend-following methodologies to succeed in the markets.
The results of the experiment showed that in fact traders can well be taught to be profitable in the markets. Some of the turtles have become very successful private traders and hedge fund managers.
The idea of trend trading attracts many traders. From the law of physics we know that everything follows the path of least resistance. Trading of most trend traders is long-term. They strive to focus on the daily and weekly chart in search of the most powerful movements.
The main goal of a trend trader is not to predict where the market can go, but to join a market that is already showing signs of strong movement in a certain direction. Traders are trying to enter established trends and stay in them as long as the market continues to move in the right direction.
The main difficulty that many novice traders encounter is that they enter the market too late. By the time most retail traders enter the trending market, most of the movement has probably been exhausted. Thus, the trick is to identify the emerging trend as early as possible and enter the market as close as possible to the beginning or middle of the trend.
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