And why it’s important to pick carefully
By Your Trading Mentor,
WHY IT’S IMPORTANT TO PICK CAREFULLY
Picking the right type of trader for your skills, personality, and financial goals is crucial for success in the world of trading. Choosing the wrong type of trading can lead to frustration, losses, and ultimately, failure.
Firstly, different types of trading require different skill sets. For example, day trading requires the ability to make quick decisions under high-pressure situations, while swing trading may require more patience and discipline. If you don’t have the necessary skills for a particular type of trading, it can lead to poor performance and losses.
Secondly, different types of trading have different risk profiles. Scalping, for example, can be a very high-risk strategy, while position trading may be more conservative. If you have a low-risk tolerance, it’s important to choose a trading style that aligns with your risk preferences.
Thirdly, different types of trading require different amounts of time and effort. Day trading requires a significant time commitment, while position trading may only require a few hours of research per week. If you have a busy schedule, it’s important to choose a trading style that you can realistically commit to.
Finally, different types of trading may be more or less suited to your financial goals. If you’re looking for quick profits, day trading may be a good option, while long-term investing may be more appropriate if you’re looking to build wealth over time.
Here is a breakdown on the different types of trader:
Scalp trading is the quickest form of trading the financial markets. This means that traders are only really looking for small moves and will open and close their trades very quickly, often within the hour and sometimes only for a matter of minutes. Scalp traders will often use high leverage to make the most in the small fluctuations in price and will be looking for precise entries on small times frames at high volatility times including London Open, New York Open or big news events such as NPF.
My best piece of advice for scalp traders is to still pay attention to the higher time frames and make sure you only actually scalp in the direction of the long term trend. It might be tempting to just buy and sell every time you see a position with your strategy, but if you can establish the long term direction and where there is significant momentum on the 4H or 1D chart then you might miss a few opportunities but you will avoid big losses. If you think about time frames like the ocean, the 5M time frame are ripples, the 4H time frame are waves and the 1D time frame are tides. You don’t want to be trying to catch a ripple in the opposite direction to the tide otherwise you’ll likely drown. Dr Alexander Elder goes into this analogy in a lot of detail in his book Trading For A Living which I highly recommend and you can check out on Amazon here
Day trading is believed to be the most common form of trading forex and the stock market. This is when traders open and close their positions within the day, closing any trades before going to be in the evening. Sometimes this involves holding trades for one hour but often it is for a few hours. Day traders will often trade on time frames such as the 4H chart but will sometimes drop to smaller times frames such as the 15M for an exact entry and will often use the 1D chart to gauge long term momentum. Day traders will often use leverage on their trades to make the sometimes small daily fluctuations in the financial markets more profitable. For day traders timing is really key and they will often utilise key times of the day to maximise their profits such as session open times when there is often more volatility in the markets
My best piece of advice for days traders would be to pay close attention to what happens at certain times of day. There are many daily fluctuations throughout the 24 hour period and you’ll need to become really familiar with those which are taking place while you are trading. For example, there is often high volatility during London open (which is 8AM UK time) and often markets can move with nice momentum up until around 13:30 when the US starts to wake up and loads of economical data gets released. This can often cause reversals in the market, so if you are in high profit for the start of the London session you might want to consider closing your trade and taking your profits before any news is realised in the US. New York open is an hour after the news releases, at 14:30 UK time and this can cause yet another direction change or a big move in the same direction as the news depending on the results. 16:00 is when London starts to close which can often mean traders are closing their positions and taking their profits which can cause yet another direction change. So timing is very important when you are a day trader, and not only will you want to plan your entries around factors such as market opens or the 4H candle closing but you’ll also want to be ready to close a trade early and take profits if it’s approaching a time when the markets often reverse and you are in good profit.
Swing trading is a slightly longer form of trading where traders will hold their trades for at least one night and sometimes for weeks. Swing traders are aiming to make the most in the swings in the market, which are essentially the longer trends which take place. Often swing traders will look for entries on the 4h chart but will also be using 1D and 1W in their technical analysis. Swing traders will also be really interested in big news events which set the semi long term direction of trends, such as interest rates decisions, CPI or NFP.
My best advice for swing traders is so get really good at understanding fundamental analysis as well as technicals as this plays a big part in determining which way the market swings.
Position trading is the longest form of trading, these traders will be looking at high times frames and won’t be too interested in the small fluctuations in price. These traders won’t necessarily need as much leverage as they are really interested in the very long term trend of the market and will be happy to hold their position for weeks, months and even years. Position traders may be interested in fundamental factors such as how the country’s economy is doing long term, political parties in power can have an impact, as well as fiscal policy.
Similar to swing trading my best advice for position traders is to be really hot on macroeconomics and fundamental analysis as this is what’s really moving the financial markets in the long term. Understand interest rates decisions and how this can affect the long term direction of a currency is very beneficial. If you’d like to learn more about this in detail it is part of the trading course at Trading Angel Academy which you can check out here
A noise trader doesn’t so much focus on technical analysis or fundamental analysis but more listens to rumours surrounding certain financial markets and often enters on market hype. Noise traders often act irrationally: they tend to be emotion-driven, impulsive, reactive, and herd-like. Whilst noise trader can be quite systematic in their approach to trade entry, their chose markets are often not advised by professional investors.
An algorithmic trader will use automated trading instructions to enter into and out of trades. Its believed that more than 90% of trading in the forex markets is done by trading algorithms rather than humans. Some traders believe that using a algorithm is the key to success as a trader as it is able to remove the emotion for entries and exits and rather trade based on back data and logic.
Arbitrage traders simultaneously purchase and sell assets in an effort to profit from price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies—it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. This type of trading is often associated with hedge funds, and it can be a fairly easy way to make money when it works.
For example, if a security trades on multiple exchanges and is less expensive on one exchange, it can be bought on the first exchange at the lower price and sold on the other exchange at a higher price.
It sounds simple enough, but given the advancement in technology, it has become extremely difficult to profit from mispricing in the market. Many traders have computerized trading systems set to monitor fluctuations in similar financial instruments. Any inefficient pricing setups are usually acted upon quickly, and the opportunity is often eliminated in a matter of seconds.
Sentiment traders seek to identify and participate in trends. They do not attempt to outguess the market by finding great securities. Instead, they attempt to identify securities that are moving with the momentum of the market.
Sentiment traders combine aspects of both fundamental and technical analysis in an effort to identify and participate in market movements. There are a variety of sentiment trading approaches, including swing traders that seek to catch momentous price movements while avoiding idle times and contrarian traders that try to use indicators of excessive positive or negative sentiment as indications of a potential reversal in sentiment.
Trading costs, market volatility, and difficulty in accurately predicting market sentiment are some of the key challenges facing sentiment traders. While professional traders have more experience, leverage, information, and lower commissions, their trading strategies are restricted by the specific securities they are trading. For this reason, large financial institutions and professional traders may choose to trade currencies or other financial instruments rather than stocks.
Success as a sentiment trader often requires early mornings studying trends and identifying potential securities for purchase or sale. Analysis of this nature can be time-consuming, and trading strategies may require quick timing.
Fundamental traders are using economic data and analysis to help them make their trading decisions. This means considering things such as interest rates, employment, balance of trade and many other specific news releases including non farm payroll. Ultimately a fundamental trader will be more interested in news releases then what is going on in the charts.
Fundamental trading has a real appeal to many investors because it is based on logic and facts. Of course, unearthing and interpreting those facts is a time-consuming, research-intensive effort. Another challenge comes in the form of the financial markets themselves, which do not always behave in logical ways
Whilst a fundamental trader will focus on news releases and economic data, a technical analysist will be more interested in what the chart is telling them. Technical analysis will use candlestick charts, patterns, price action and technical indicators to make entry and exit decisions on their trades.
In conclusion, picking the right type of trader for your skills, personality, and financial goals is crucial for success in trading. It’s important to do your research, understand the different types of trading, and choose a style that aligns with your strengths, risk tolerance, time commitment, and financial objectives. By carefully selecting the type of trader you are, you can increase your chances of success and achieve your trading goals.
WHAT KIND OF TRADER AM I?
Well I am a mix between fundamental, technical, day and swing! I believe that ultimately the long term direction of the financial markets is determined by fundamental factors such as interest rates, however the short term entries are often found using technical analysis. I also tend to open and close my trades within the day however I do sometime make the most of the long swings and occasionally hold them overnight.
What type of trader are you?
Love from your Trading Mentor,
Trading Angel x