- And Which One Is Right For You
By Your Trading Coach,
Trading Angel
FOUR MAIN TYPES OF TRADER
There are four main types of forex trader and while these can be broken down into personalty traits which assume each person is more suited to be one type of trader then another, most traders when they first start out don’t actually have a big say in what type of trader they are going to be, and often that’s due to time limitations and account size. In this blog post I’m going to describe each of the four main types of trader and go into who is best suited to each as well as to say which type and why I feel is best suited to beginner traders.
The four main types of forex trader are:
SCALP TRADER
DAY TRADER
SWING TRADER
POSITION TRADER
SCALP TRADER
Scalp trading is the quickest form of forex trading. Traders are just looking for small fluctuation in the market to grab some quick pips. Sometimes it will just be a matter of minutes which they hold their trades open for, other times it will be as quick as seconds. This type of trading often appeals to new traders, but if you are a beginner trader I would actually advise you not to start scalping for a bit. It might sound like it’s easier as it’s over very quick, but often it is actually more difficult than the other forms of trading. It is a very aggressive form of trading which takes enormous focus and requires traders to be incredibly decisive and have impeccable risk management. It’s like day trading but on steroids. And day trading is famously not easy. One aspect of scalp trading which I can understand is very appealing to newer traders is that it is possible to do on a smaller account, as the stop loss will often be a lot tighter than when you are trading on a higher time frame. Scalp traders often trade on small time frames such as the 5M or even the 1M.
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 https://amzn.to/3SlMXJ6
DAY TRADER
Day traders open and close their trades within a day without holding any positions over night. Often they will be trading on the 4H time frame or even down to 15M for precise entries. Day traders will need to use bigger stop losses for their trades than scalp traders as they need to account for the increased volatility which comes with holding trades for longer periods of time over the day and taking positions on higher time frames. However day traders also benefit from not having to pay the extra costs of slippage or overnight fees. While this style of trading isn’t as quick as scalping, it still require a high level of accuracy, focus and risk management.
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 TRADER
Swing traders will hold their trades over night and sometimes for several days or even weeks. They are really looking to catch the market ‘swings’ by buying at the bottom of a trend and selling at the top. Swing trading takes a lot of patience and careful analysis. It also requires the trader to have very steady nerves as they need to ride out fluctuations and sometimes relatively large pull backs. Swing traders will often trade on the 1D or the 1W charts and will need to have larger stop losses to account for the fluctuations which might happen on these higher time frames.
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 TRADER
Positions trading is the longer form of trading. Position traders will hold their positions for weeks and sometimes months or even a year +. They are really looking for the bigger picture of where the market is moving in the long term and are not interested in the small fluctuations in price. While position trading might sound very peaceful it often require very large trading accounts which are able to ride out any fluctuations.
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
WHAT TYPE OF TRADER AM I AND WHICH DO I THINK IS BEST FOR BEGINNER TRADERS
When I first started trading forex I wanted to be a swing trader as I was told it was the least stressful. When I was swing trading I was checking the charts once a day in the evening on the 1D chart which worked very well for me while I was working a 9-5 job. For this reason it’s great for new traders who have a very intense job which means they can’t actually look at the charts during the day. The problem I had was that I started trading on a very small forex account of just a couple hundred pounds. It’s very difficult if not impossible to be a swing trader on a small account, although my strategy worked very well on paper I was finding that my account size wasn’t large enough to hold the trades open for long enough because I could only open about 5 positions at once. I also felt like the stop losses which I needed to use based on volatility were too big for my small account. So I tried day trading instead. I found the transition challenging as I had to completely change my stagey and rather then focusing on long trends I was having to look for momentum and breakouts and then time these very carefully based on session open times. If I wasn’t paying attention I would leave a trade open for too long and have it suddenly reverse on me having previously been in profit. My little trick which I used to get around this is to set alarm clocks first thing in the morning when I wake up which remind me to check the charts and review my trades regularly throughout the day. As a day trader I trade on the 4H chart which I found worked well still even when I was still working another job. I only had to look for trade entries once every 4 hours when the 4H candle closed and as this was at the same time every day it was pretty easy to manage and to fit into my routine.
I think for this reason day trading is very manageable for newer traders as the 4H chart allows them to still work their other job.
If someone comes to me looking for a trading mentor and asks what type of trader they should be I will ask them two questions.
How flexible are you during the day?
How much money are you able to start trading with?
Flexibility during the day is very important. If you are a nurse working in the NHS, for example, who is not allowed to look at their phone during the day, you would find it impossible to be a scalp trader or even a day trader but you might be able to manage swing trading by checking the 1D chart once a day when the markets close in the evening – similar to what I did when I first started trading forex. If you do work during the day but have a bit more flexibility and can easily check the charts every 4 hours to get a reading when the 4H candle closes, then being a day trader might work for you. But I would also check if it was a problem to have alarms going off every couple of hours to remind you to review your trades at different sessions open and close. In some jobs this would be ok and in others it would be completely unacceptable.
With the rise of people working from home it’s actually becoming easier for more of us to realistically be day traders.
It can be a bit stressful and intense trying to juggle both day trading and your normal 9-5 simultaneously so if you are someone who finds its difficult to focus on more than one thing at a time but you do work from home and would like to try fitting trading into your daily routine, it could be an option to try scalp trading the London open. For about half an hour to an hour each morning at 8AM UK time there is a lot of volatility on the UK100 or the FTSE as the London stock market opens. It can present a good scalp trading opportunity which could potentially give you the opportunity to trade for an hour in the morning before working on your 9-5. I recently started testing out a scalp trading strategy for this period in the morning, and one thing I will say is that there aren’t good opportunities every day so definitely don’t force trades if you don’t see good set ups. Its also really important to do lots of back testing and live testing first before you start live trading as these markets move FAST!! If you are interested in this as an option, I recently made a YouTube video which is up on Trading Angel’s YouTube channel which highlights the 5 things I wish I knew when I first started trading the London Open, you can watch that video by clicking this link
Happy Trading!
Love From, Your Trading Coach x