Chapter 2-5 Trading Styles

There are four main types of trading styles.  Each is unique and effective; however, the trading style you ultimately choose will most likely be directly correlated to the time and effort you are willing and able to devote to trading.

Scalping and intraday trading (or day trading) are considered short-term trading styles, while swing and position trading are known as long-term trading.  Obviously, if you do not have the luxury of being able to trade every single day, especially during the open and close of the markets, short term trading would most likely not be suited for you.  Instead, swing or position trading would be more feasible, as both, in general, require less time dedicated to the markets.

Each trading style (scalping, intraday, swing, and position) has advantages and disadvantages associated with it.  Furthermore, while trading strategies, for the most part, are the same across all four styles, the average time spent in a trade and the common charts one would use vary greatly.

Scalping

This style is known as the quickest form of trading.  Trades can last as short as a few seconds to as long as a couple of hours.  With this style traders attempt to profit on any and all moves in the market.  As a result, traders can produce profits greater than a point, but often capture much smaller moves, sometimes as little as 5 to 10 cents.  While these moves are often tiny, especially in comparison to moves from other trading styles, the losses incurred are smaller as well.  Furthermore, traders often take much larger positions as a result of the smaller gains and losses.  Typically, scalpers rely on momentum and look for volatility as this style suits quick changes in direction.  Scalpers predominately use 1 and 2 minute charts when trading.

Advantages:

  • High percentage of winning trades
  • Minimal risk per trade
  • Numerous trading opportunities every day
  • Captures quick moves and changes in trend
  • No overnight risk
  • Fundamental analysis is not relevant

Disadvantages:

  • Extreme emotional and psychological pressure on trader to make split-second decisions
  • Can exit too soon from profitable trades due to nearsightedness
  • Need an advanced trading platform, computer, and Internet connection as speed of execution is critical
  • Involves constant focus on the markets, especially during the open and close of the trading day
  • Churning (overtrading) can dramatically lower reward to risk ratios
  • Incur high transaction costs

Intraday Trading

Also known as day trading, this style of trading involves trades that are opened and closed during the day.  With this style traders attempt to capitalize on the overall trend of the day.  Typically, trades last from a couple of minutes to a whole day.  Trades often require slightly more risk than trades placed by scalpers, but also produce bigger gains.  However, intraday trading is similar to scalping in that fundamental analysis does not play a part in most decision making.  Moreover, intraday trading, though not as intense as scalping, requires constant attention during the trading day.  Intraday traders typically use 5 minute to 30 minute charts.

Advantages:

  • An improved reward to risk ratio compared to scalping
  • Greater potential for big gains compared to scalping
  • Captures the majority of a daily move
  • No overnight risk
  • Fundamental analysis is not a major factor

Disadvantages:

  • Some degree of emotional and psychological pressure to make quick decisions on entries and exits
  • Requires extreme discipline as reward to risk must always be top priority
  • Can be whipsawed (stopped out) of a big move due to volatility even though correct trend was identified
  • Need a decent trading platform to execute at various key entry and exit points

Swing Trading

This is undoubtedly the most common style new trader’s use for better or for worse.  This is because it suits the lifestyle of those who care to participate in the markets, but have other responsibilities such as another occupation.  Trades placed with this style often last anywhere from 2 days to a week, and attempt to capitalize on the predominant weekly trend.  Consequently, trades do not require as much attention, as monitoring of target and exit points can be done periodically.  Swing traders typically use longer interval charts, such as a 1 hour chart, along with a 5 minute.  Moreover, while swing trades require more risk than both intraday and scalping, they also produce higher returns.  Fundamental analysis does factor into the decision making when swing trading, as well as any announcements, news, or economic data that may affect the direction of a move.

 

Advantages:

  • An improved reward to risk ratio compared to intraday and scalping
  • Greater potential for big gains compared to intraday and scalping
  • Captures the majority of a weekly move
  • Low degree of emotional and psychological pressure as decisions are not as time sensitive
  • Less effected by intraday market action
  • Low transaction costs
  • Can monitor positions periodically
  • Most trading platforms, computers, and Internet connections are sufficient as speed of execution is not as important

Disadvantages:

  • Overnight risk
  • Requires extreme discipline as reward to risk must always be top priority
  • A high level of patience is required
  • Low percentage of winning trades
  • Unable to capitalize on short-term moves
  • Need to stay abreast of any announcements, news, or economic data that may affect current trend

Position Trading

Not to be confused with investing, position trading takes extreme patience as trades last anywhere from a few days to several months.  With this style of trading, once targets and exit points are put in place, traders can monitor positions when available.  Position traders use both technical and fundamental analysis when determining when to enter and exit trades.  Moreover, there is considerably more risk involved, but with that risk, the potential for gains is exceeding higher compared to using any of the other trading styles.  Traders who position trade typically use daily charts, but can use smaller intervals as well, such as 1 hour charts to get a closer look at the most recent activity.

Advantages:

  • An improved reward to risk ratio compared to swing, intraday, and scalping
  • Greater potential for big gains compared to swing, intraday, and scalping
  • Captures the majority of a long-term trend
  • Low degree of emotional and psychological pressure as decisions are not as time sensitive
  • Likely not effected by any particular intraday market action
  • Very low transaction costs
  • Can monitor positions periodically
  • Most trading platforms, computers, and Internet connections are sufficient as speed of execution is not as important

Disadvantages:

  • Overnight risk
  • Requires extreme discipline as reward to risk must always be top priority
  • A high level of patience is required
  • Low percentage of winning trades
  • Unable to capitalize on short-term moves
  • Need to stay abreast of any announcements, news, or economic data that may affect current trend
  • Must factor in fundamental analysis, as well as technical analysis

Which is the best?

Success can be found using any of these styles; however, you will gravitate towards the trading style that suits your lifestyle best.  Moreover, your personality, resources, needs, and time all should be considered when deciding which style of trading to pursue.

If you are able to dedicate ample time to the markets and have a desire to be involved every trading day, then short-term trading most likely best suits you.  However, if you are preoccupied with other tasks during the day and have the ability to practice solid discipline and patience, then a long-term trading style will be adequate for you.  Moreover, if you like to base trades heavily on fundamental analysis, then a long-term style such as swing or position trading would better suit you as it often takes time for fundamentals to affect price action.

Furthermore, as traders gain experience and confidence, traders often implement a combination of styles.  It is common to see experienced traders use any of these styles interchangeably depending on the market conditions.  Keep in mind, the most important thing is that you are comfortable with the trading style you choose and are aware of the advantages and disadvantages that are associated with that style.  Your probability of success will inherently increase when using the trading style that suits you.

Questions