To trade forex successfully you need to know your personality type and match that to a trading style…
There are Four Basic Trader Types:
Scalpers generally trade much more frequently than other traders. The object is to enter the market fast and exit just as fast, making a few pips profit each time, often at the risk of many more pips than is made.
Knowing how to trade forex markets in such a frenetic fashion does not come easily to the new trader. The section on Scalping has more details, including a discussion of this method’s advantages and drawbacks that may assist in your assessment of its suitability for your personality.
The prevailing trend is less important to a scalper that it is for other traders, as the moves are very small and therefore generally not affected by the higher timeframe trend.
One observation that is not often made about scalping is that your choice of FX trading platforms becomes critical when you are trading in such an intense manner. Your platform must be reliable, quick to respond and not subject to manipulation by the broker.
One step up the scale from the prolific trades of scalping is the day trader. The day trader aims to both enter and exit the market within the course of a single trading session if possible.
Day traders typically require a risk to reward of at least 1:1. The pace of day trading is nowhere near as fast as scalping, allowing the trader more flexibility in having to watch the market.
Some day traders simply walk away from their screens having set alarms that will send an SMS alerting them to the possibility of a trade entry.
Day traders may trade either with the daily trend or against it, but more generally with it.
Position traders are longer-term traders, typically holding a position for anything between days to months at a time.
Some position traders use purely fundamental analysis to get their entries, but it is more common to use a combination of both fundamental and technical analysis. For example, a position trader may decide to take a bearish view on a currency based on a number of fundamental factors such as interest rate, economic performance of one of the currencies involved in the pair, global economic fundamentals, central bank policy changes etc.
The position trader will then look for a technical entry which allows them to sell the pair, generally setting a stop that is very large, hundreds of pips perhaps. They then attempt to trail the stop over the course of the ensuing weeks.
Some will have set a take profit target, whereas others will be content for market swings to eventually take them out of the trade as they trail their stop in profit behind the current price.
It can be seen that position traders mostly trade in the direction of the longer-term trend.
Swing trading is the art of picking medium term tops and bottoms in price movement within the context of a larger overall trend. The overall trend may be bullish or bearish, but the swing trader will look for opportunities within that trend.
Swing trading is generally a longer term proposition, although technically it can be traded as an approach on lower timeframes as long as the trader is focused on identifying points where price will reverse and “swing” back the other way.
The swing trader may for example be trading short on a long-term uptrend. Then, they may exit the short trade at or near the end of the run down in price, only to take a long position if the signals for such now occur.
If the trend is long-term the profit targets and stops are generally larger than for a short term trend. Swing traders use a variety of technical analysis tools including but not limited to Fibonacci retracements and extensions, support and resistance levels, old highs and lows, pivots etc.
There are a great many variations in the definitions given above, and other types of trader are also defined elsewhere. If you want to investigate your Trader Type further the following sites may be helpful:
Babypips: Which Type of Trader Are You?
Investopedia: Introduction to Types of Trading: Technical Traders
Investopedia: What Type Of Forex Trader Are You?
The Van Tharp Trader Test extends the idea into a deeper examination of personality types. It consists of 35 questions you answer to find out your “Trader Type”.
Another useful tool for those wondering about their trading style, and it’s a lot of fun!“Okay, I know what type of trader I am, what’s next?”
The strategies on this site fall into two broad categories: manual and automated. Sequentially the next step would be to go to Forex Trading Strategies.