The Three Types of Forex Traders

Day Trader

Day traders hold their positions for less than a day and end each session with no open positions. Day traders can trade any liquid market and can use several types of strategies. Momentum, mean reversion, trend following, and pattern trading can all be used on an intraday basis.

In general, day traders focus on supply and demand and on sentiment, rather than on fundamental analysis. Nearly all day traders use charts as their primary tool and develop their own set of chart-based strategies.

Day trading offers traders a fast learning curve because shorter time frames provide trading opportunities more often. Day traders also have the chance to compound their profits faster and have a smoother equity curve.

The downside of day trading is that it requires one not only to have the time to watch the market day but the ability to remain focussed for hours at a time.

Swing Trader

When you first start learning how to become a forex trader, day trading may appeal to you. But it’s possible that watching the market all day and making very fast decisions is not the best way for you to trade.

If you are more of a strategic thinker and like to spend some time planning each trade, swing trading may be for you. Swing traders trade the oscillations that happen within longer-term trends and trading ranges. Typically, a swing trader will hold a position for anywhere between 1 and 5 days, though it can be longer than that.

Swing trading is most common for stocks but can be used for any instrument. Like day trading, swing traders rely mostly on charts and on trying to gauge sentiment, though they may look at fundamentals and relevant news as well.

A swing trader is mostly interested in finding the level at which a stock or forex pair may reverse within a channel and move in the opposite direction. To do this they are going to use support and resistance levels, trend lines and oscillators. Swing traders often use Elliott Wave analysis to map out potential scenarios. They are also very interested in market sentiment and trying to gauge how the market feels about an asset and how or when that may change.

Swing traders don’t need to spend as much time watching the market but do need to put in a few hours analysing charts each week. When it comes to executing trades, this can be managed using prices alerts and a mobile phone. While a swing trader doesn’t need to watch the market all the time, they do need to be in touch with the market at all times.

Swing traders need more capital than day traders and also need to be able to ride larger swings in their profit and loss (P&L).  As a swing trader, you don’t get to go home with no positions at the end of the day, which can be stressful.

Position Trader

A position trader is somewhere between a trader and an investor. Position traders usually own a handful of stocks, forex pairs, or other assets, which they get to know very well. They will hold these positions for anywhere from a month to a few years if they believe a trend will continue.

Position traders use whatever information and research they can and usually get to know the dynamics that drive supply and demand for an instrument very well. They will often hold a core position over the long term and then trade smaller positions around that – buying on pullbacks and selling when they think the price is too high.

One of the main advantages of position trading is that it requires very little time. Once the initial analysis is done, all that’s required is keeping up to date with any new developments.

The disadvantage of position trading is that your P&L is likely to have very large swings and you will need to have nerves of steel to hold onto a position through periods of volatility.

Position trading is best for those who are very analytical and have very good general knowledge.

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