There are millions of day traders across the world. Most of these traders use different strategies and trade different assets. In this article, we will look at the top 4 types of forex traders and how their approaches differ from each other.
Day traders are traders who focus on opening and closing multiple trades every day. They differ from other traders because they don’t believe in leaving trades open overnight because of the risks associated with it.
The typical day of a full-time day trader starts with reading the news from credible platforms like the Wall Street Journal (WSJ), the Financial Times (FT), and Bloomberg. They also look and analyze data in the economic calendar. That helps them identify potential currency pairs to trade. The final step is where they conduct technical analysis and use their trading plan to execute trades.
Day traders are also different from other traders because of the charts they look at. Ideally, most day traders use candlestick charts that are less than one hour. The sweet spot, to most of them, is a 15-minute or 30-minute chart.
There are two major day trading strategies:
- Scalping. This is a trading strategy that involves opening trade and closing it within a few seconds or minutes with a small profit. At the end of the day, those small profits from multiple trades can add up to something big.
- Pair trading. It is an approach where they mitigate risks by opening two trades of correlated assets simultaneously. The idea is to make a profit by subtracting the profit from the winning trade from those of a losing trade.
Other day trading strategies, including trend following, algorithmic trading, and even copy trading.
Swing traders are market participants who open trades and then hold them for a few days. Ideally, a swing trader will analyse a forex pair and try to estimate what will happen in a certain period that ranges from 2 to 6 days.
For example, on a Monday morning, a swing trader can look at the EUR/USD pair and then attempt to figure out how the week will unfold. To do this, he will look at the economic calendar and identify key events that are likely to move the pair.
Also, they will identify the main news events that will affect the direction of the pair. These could be a political event or economic data like the nonfarm payrolls or interest rate decisions.
Unlike day traders, swing traders mostly focus on longer-term charts that range between hourly and daily charts. Ideally, those traders who hold their trades for a week will use longer charts than those who hold them for two days.
Swing traders use various approaches. There are those who use price action, where they rely mostly on chart analysis. There are others who focus on pairs trading and those who use trend following strategies.
Position traders are relatively similar to swing traders in how they hold their trades for a longer duration. That could range from a week to a few months. That makes them investors.
In position trading, the goal is to conduct a thorough analysis of a currency pair and attempt to predict how it will move in the future. For example, you can look at the EUR/USD today and predict how it will move in the next few weeks or months.
They use several approaches to make this prediction:
- They focus on technical analysis to identify these patterns. That includes using tools like moving averages, relative strength index, and the Donchian channels.
- They identify longer-term patterns on a currency pair and trade it. Some of these patterns are Elliot wave, cup and handle, harmonic patterns, pennants, flags, and triangles, among others.
- They also look at the current news and events and anticipate what will happen in the future. For example, if the EUR/USD is trading at 1.1200, and you believe that an election will be positive to the euro, you can buy the currency and wait for it.
Another difference between position traders and other types of traders is that they tend to have a huge appetite for risk. That means that they are willing to hold a trade even when it makes a loss based on their bigger picture.
Algorithmic or high-frequency traders (HFT)
Algorithmic traders are those traders who focus on trading robots or algorithms. In most cases, these traders usually have a background in data science or software engineering fields. They also usually have many years of experience in trading, especially using technical analysis.
By having the software and technical analysis skills, these traders are able to create a code based on their trading strategies. Broadly, there are two types of bots:
The first one is a bot that can scan the market, identify opportunities, execute trades, and stop them. These bots can open tens of trades every day, which makes them highly effective when implemented well.
The second one comprises the bots that generally scan the market, identify opportunities, and then send a signal to the trader. These bots are effective because they don’t implement the trades. As such, the trader must see its analysis and then dig deeper to find out whether the bot is correct.
Most algorithmic traders, however, don’t have the coding experience. Instead, they rely on pre-built trading bots sold on the Internet. Most of these bots are usually free, but some of them can cost thousands of dollars.
Interestingly, traders using all these approaches make money eventually. The success depends on the level of experience. For example, highly experienced day traders will make money most of the time. Similarly, experienced swing and algorithmic traders will make money.
At the same time, successful traders are disciplined, meaning that they know how to mitigate risk in every trade that they make. This can involve having a stop loss in every trade, having good leverage, and positioning their trades well.