A style is not only an attribute of fashion. This word may be actually applied to trading.
On the one hand, each person has his/her own approach to trading. Even two people who have read the same textbooks about trading and watched similar tutorials will trade differently. In fact, their trades will differ even if they both decide to buy the stock of Alphabet Inc. The reason for such discrepancy is that each trader will choose his/her own entry and exit levels. This will happen because the market is too diverse and one can make hundreds of various actions.
On the other hand, it’s possible to distinguish the features that some traders have in common. These features allow to set out the so-called trading styles. It’s useful to know what each style is about. This way you will be able to choose the style which fits your personality. Then it will be much easier for you to create or find a suitable trading strategy.
There are 4 main trading styles: scalping, day trading (also known as intraday trading), and position trading. The main distinction between them is in the period during which a trader holds the position open. All other differences between the mentioned trading styles emerge from this thing. Let’s go through the trading styles one by one.
The name of this trading style refers to the fact that a trader acts in an aggressive manner trying to slice profit of the market. A scalper keeps a trade open for seconds or minutes. The timeframes used by scalpers are very small: under 30 minutes.
It’s easy to see that due to the extremely short-term nature of such trading, the amount of potential profit in one trade will be limited. The price simply won’t be able to make hundreds of points in 5 minutes, at least if we are talking about the normal market conditions when nothing extraordinary happens. As a result, in order to get a decent amount of profit by the end of a trading day, scalpers have to perform multiple trades. The criterion of success for a scalper is then a summary of results for a day or a bigger time period. Although each trade is quick, you will need to assign quite a lot of time to your scalping activity.
It’s necessary to point out that scalping can be rather stressful. A scalper tends to constantly monitor the market. He/she needs to be on the alert at all times in order to act timely in the environment when the price moves fast and the open trade can swing from profit to loss and back in no time. Even if a trade closes in minus, a scalper has to keep a cool head and dive into further trades. All in all, the rapid nature of scalping makes it work best for those traders who are resilient to stress and have a big passion for feeling the pulse of the market.
Beginners should be cautious with scalping and make sure that they abide by the rules of position sizing and risk management if they decide to go for it. Some scalpers prefer not to use stop loss orders and close their trades manually. If you use a stop loss order though, there’s sense to use the tight one.
Trading strategies which are edged for scalping are usually made of a few simple elements. If you are decide to scalp, choose liquid trading instruments: you will want the price to move lively enough for your trades to reach targets fast.
As it must be clear from the name of this trading style, day trading refers to trading during the day without holding a position overnight. At the same time, day traders keep their traders open for longer than scalpers. Usually, it’s about hours. The timeframes used for trading range from M15 to H4. A day trader usually makes 1-5 trades a day — fewer than a scalper — while potential profit in one trade is bigger. Stop losses can be normal, in line with a technical trading strategy.
Day trading is a good option for those who only start trading. It allows to avoid the rush of scalping and doesn’t require the skill of forecasting big and lasting moves of the market.
Swing trading is a kind of hybrid trading style. It has a more vague relation to the concept of time and is closely connected to price action. Swing traders aim to catch a swing of the price, i.e. the movement from a low to a high or from a high to a low. A trader enters the market when the previous swing is over and exits after the market forms a new high/low. Usually, this takes from one to several days.
Swing trading can potentially deliver sizeable profit in a single trade. Having several swing trades a week is the optimal load. Stop loss orders in swing trading will probably be wider than in day trading.
Position trading literally means that a trader occupies a position and retains it for many days or even weeks, sometimes longer. In this case, he/she will use daily and weekly timeframes.
Such long-lasting positions require a good trade idea. Notice that position trading often implies trend trading. To identify a trend at an early stage you will need to conduct a thorough market analysis, both fundamental and technical. Such trades will naturally be rarer, but each one will have the potential to result in a huge profit. As you probably won’t trade every day, you will ultimately need less time for trading than you would if you practiced scalping. Risk/reward ratio will let you have a wide stop (so that the trade doesn’t fall victim to the short-term volatility). In addition, there is a lot of sense to use trailing stops in position trading. This approach will allow to limit risks and lock in profit so that a trader could sleep calmer.
All in all, position trading is a much more merciful option for your nerves than scalping. You will be able to set the parameters of your trade and go away to mind some other business and keep yourself free of the emotional turmoil. At the same time, it’s recommended to do position trading if you are strong in analysis and patient enough to wait for days and weeks until your trade is closed. This is another trading style that might be difficult to handle for newbies.
The bottom line is that you should choose a trading style that really fits your personality and resources. Try to determine how much time you have for trading; what are your strong and weak points; how well you deal with stress; whether you are a patient person or not. Then match your answers with the descriptions of trading styles and choose the one that looks the most compatible. You can have more than one trading style at a time, although all of them at once might be quite overwhelming. Try to adhere to one or two trading styles. If you feel that something is not right, switch to another one. Good luck in your trading!