This goes without saying: the forex market is huge, with around 10 million traders globally. With this number, you can't expect all traders to be the same.
Like normal human beings, each forex trader has their preference and goals, leading them to trade differently.
Three common types of short-term forex traders exist: the Scalpers, Day Traders, and Swing Traders. Remember, choosing which one suits you must be based on your trading skill and risk appetite.
If you're a scalper, you uphold the principle of accumulating small wins to a large gain. Essentially, you view tons of small wins as a large gain. This approach goes against strategies that target larger profits from fewer trades.
Scalping means you're holding many positions over a short period (from a few seconds to a minute). But how will you profit from keeping the position for a short period?
Well, your best friend here is the market volatility. Scalpers thrive in environments with high volatility because it increases the frequency and amplitude of price movements, providing more opportunities for quick trades and small profits.
But like any other type of trading, scalping involves high risk because it plays along with the market volatility. To manage the market risk, scalpers must set tight stop-loss orders and follow a strict risk-reward ratio to avoid falling into the risk of fast-paced markets.
Note: When scalping the market, you must watch for major economic news releases. What you can do is stay up to date with the major economic calendar.
As the name suggests, day traders hold their position within the trading day. Like scalpers, day traders expose themselves to the market over a specific period to profit from small market movements.
The main difference between the two is day traders often hold only a single or relatively fewer positions than scalpers. And yes, day traders don't like keeping their positions open overnight.
But remember, day traders vary depending on their strategy. Here are the common types of day traders and how they work on the market:
Trading the trend suggests that the trader aims to profit from the currency pair's current or upcoming market direction.
To effectively do this, you must maximize the market data you get from technical analysis. This includes watching and monitoring indicators such as moving averages, support and resistance, and momentum oscillators.
Trend traders typically buy assets trending upward or sell assets trending downward, aiming to ride the trend until it reverses.
Every countertrend trader is on the lookout for potential market reversals. Identifying the market's overbought and oversold condition is essential for every countertrend trader.
Suppose you want to trade the market countertrend. In that case, you must know how to find and use the RSI (Relative Strength Index) or the Stochastic Oscillator to anticipate the possible market reversal.
Countertrend traders aim to enter trades at the peak of an uptrend or the trough of a downtrend, anticipating a reversal in price direction.
Range traders profit from price movements within a defined trading range or consolidation phase.
If you trade the market range, you should effectively identify the market's support and resistance levels using technical analysis tools such as horizontal trendlines or pivot points. You aim to buy a currency pair depending on its support and resistance level.
You should buy a pair when it's nearing the support levels and sell near resistance levels to take advantage of the price oscillations within the range.
When you want to profit from the market breakout, the bullish or bearish direction is your focus. Essentially, breakout traders use significant price movements when the currency price level breaks out from its support and resistance.
To effectively trade the breakout, you should identify breakout opportunities using technical analysis patterns such as triangles, flags, or rectangles. Breakout traders aim to enter trades when the price breaks above resistance or below support levels, anticipating a continuation of the breakout momentum.
If you think scalping and day trading are too fast paced for your financial goal, swing trading may be for you. Essentially, swing trading is the semi-long-term trading style where you hold your position on the market for more than two days.
This trading style is best suited for employed traders who don't have the time to closely monitor the minute changes in the market. Swing traders attempt to market swings within the specified timeframe and strictly enter when there's a high chance of profiting from the position.
Unclear? Assume you want to buy (go long) EUR/USD. What you'll do is identify the market swing and only enter at its swing lows. Conversely, if you're going short (sell), you only enter the market at its swing highs.
You want your trade to last long in the market. With this, you should set up a larger stop-loss order to weather the market volatility.
Does this lesson help you figure out what kind of trader you are? For the next lesson, you’ll walk through the importance of a trading plan and why having one ensures your profitability in the market.