Thursday, June 29, 2017

Forex Trading: Generating Profits Part 2: Choosing Your Currency Trading Style

forex style womanIn the previous post we discussed leverage, risk, discretionary trading and  mechanical or rule-based strategies. Hopefully, you were able to see that most successful traders take the mechanical approach to their trade decisions. They run their trading like a business by planning their trade and trading their plan!  Learning to read charts and developing a logical understanding of indicators and chart patterns,  is essential and a mandatory foundation for profitable trading.

What Kind of Currency Trading Style Suits You?

But first, new currency traders should know and decide what time frame and what style of trading suits them best. By knowing, or at least prioritizing what style of trading you plan to follow you will be better able to identify and focus your attention on what technical methods are most applicable to you and how you plan to trade.

There are  4 styles of trading practiced by currency traders. Each of these styles incorporate different time frames, risk thresholds and for the most part, different trading strategies. Once you understand the differences between a discretionary and system based trader it’s time to look at which of these 4 styles best fits your comfort level. Below you’ll find a quick description of each style to help you better understand which one is right for you.

End of Day or Inter-Day Traders

This style of trading involves trades that are open anywhere from a few days, to a few months depending on the traders technical analysis and time horizon. Advantages to this type of trading include greater potential profits when compared to a day trader because this style of trading gives the position more time. Obviously, the longer you hold a winning a position, the greater your profits. It also allows the trader to place orders, conduct research, and review open positions once per day at the convenience of his or her personal schedule. The downside to this style of trading is that stop-loss orders must be placed farther from your entry price to accommodate the daily swings in price that naturally occur. A stop-loss order is an order where-by you have instructed your broker to exit a losing trade at a pre-determined price point with the intended purpose of preserving capital.

Intra Day or Day Trading

A day trader is defined as anyone that exits all trades at the end of their respective trading day. Day trading profits are limited to what can be made that day, but conversely, losses are also limited to each days price action. This type of trader enjoys zero exposure to potential losses when they cannot be watching the markets. However, this style of trading is also subject to intra-day price swings that can wipe out any unrealized profits for the day, thus requiring discipline and a robust strategy for picking consistent profit targets.

currency notes pageScalping

Traders who employ scalping are typically looking for predictable, fast and small price moves. A scalper may only be in a trade for a few minutes. They employ tight stops and once they hit a small profit target they are out of the trade. Scalpers rely on much smaller time frames for their charting and indicator analysis, often looking at 1 minute or 5 minute charts for identifying their set-ups and entries. Like day trading, scalpers are limiting their profits and their losses. Scalpers also must be glued to their computer screens all day because the trading is fast and furious.

Automated Systems and Robots

Automated trading systems, also called robots, allow the trader to use software to trade on his or her behalf  24 hours a day 7 days a week. These software programs identify buy and sell points based on the systems built-in functions or by parameters and inputs customized by the trader. Because of its complete automation, discretionary trading and emotions are eliminated. Of course the down side to this style of trading is the complete loss of control when it comes to placing orders with your money. The other potential pitfall with automated systems is that when these systems lose money, they are still entering and exiting trades in your account.

The one common element that these trading styles require is a trading plan so that buy and sell signals are clearly defined. In future articles we will discuss in greater detail what goes into a good trading plan, important indicators, pattern recognition, and how to use them in your trading arsenal.

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