Forex trading involves many different strategies. Depending on what type of strategy you use, you may be a specific kind of trader. It is important to know the different types of traders. This is so you know how to make use of your trading strategy in the right way.
Types of Traders
While everyone has their own way of performing on their trading accounts, there are 6 main types of traders whom each use a specific kind of strategy. Here is all you need to know about the 6 main types of traders:
Day Trader
Day trading in the foreign exchange market is a trading strategy that involves opening and closing deals within the same day. The goal of the forex day trader is to make a profit off of the relatively tiny price shifts that occur throughout the trading day or session.
During the trading day, the position is opened by the trader, and then that position is closed before the conclusion of the trading day. The trader positions himself to profit from the fluctuations in the market that occur during the day session. The conditions of the market might change from day to day. The strategy that is being used must be tailored to the conditions that are now present in the market. Because day trading is done in shorter periods, the market patterns can be quite different from one trading session to the next.
Successful day traders have a strict attitude to their business, yet they remain flexible regarding their trading methods. The market determines the manner in which, the timing of, and the conditions under which they engage in a deal. For those who want to be successful in trading, developing a solid trading strategy is absolutely necessary. There is more to a successful trading plan than just a trading method. In addition to that, it details the risk management procedures and the trading timetable. The amount of volatility can change dramatically during the course of the day’s several trading sessions and at various times of the day.
Example: Gold trading chart used by day trader
It is essential to have a solid understanding of the dynamics of the trading times and sessions that you participate in and to tailor your approach to those dynamics. The selection of a trustworthy forex broker is another essential factor to take into account. Day traders are responsible for executing a significant number of orders on a daily basis. Because of this, the spreads and fees may end up being more than expected. These fees are a significant issue that can have an impact on the results of your trade.
When picking trading instruments, market liquidity is an additional feature that should always be taken into consideration. If there is not enough liquidity in a market, then orders will not always be able to be completed at the price that was requested. A trader with a long-term perspective can tolerate a loss of 10 pip. On the other hand, a short-term trader who only looks to make a couple of pips in profit does not have the same luxury.
Swing Trader
Swing trading is a form of trading that takes place somewhere between day trading and long-term trading. Trades in swing trading can run anywhere from a few days to a few weeks. The swing trader’s primary objective is to identify multi-day chart patterns. This will allow them to profit from larger price changes than would generally be experienced in a single trading day.
This method appeals to a lot of individuals due to the fact that it strikes a reasonable balance between the number of deals made and the amount of time that is required as a result of those trades. Trades with a short-term horizon demand continuous monitoring. Long-term transactions, on the other hand, demand a significant amount of trading discipline. This is in addition to the possibility that they will not be engaging enough for certain investors. Swing trading is a method that operates over a more user-friendly time frame. It is likely the main reason why it is popular among new traders.
Example: Swing trade setup in EURUSD
Swing trading gives investors the opportunity to capitalize on longer-term trends, in contrast to scalping and day trading, which rely on short-term price fluctuations. Analyses that are done on bigger time periods are often safer. However, trading over shorter time frames is more prone to being affected by noise and misleading signals. The fact that transactions are now following longer trends also indicates that there is more time for each trade to earn a profit.
There are many different approaches to swing trading that you may test out to see which ones work best for you. The first step is to examine a longer-term chart. This is in order to see whether there is a possibility that your transaction might coincide with a longer-term trend. When the direction of the trade coincides with the direction of the long-term trend, you should consider making a trade. Utilizing a secondary swing trading indicator is yet another method you may employ to further improve your technique.
Position Trader
Traders that engage in position trading have a tendency to hold long-term positions that might persist for months or even years and to overlook the short-term fluctuations in market prices. Taking tactical positions in response to cyclical shifts in the market is another meaning of the term positioning. When we talk about cyclical market movements, we’re referring to industries like construction and real estate that rise and fall in tandem with the overall economy.
Positional Trader (Long term trader or Investor) analysis on EURUSD higher timeframe monthly chart
Traders may decide to take a position in these circumstances right before the market opens in each location. This is so that they may get a short-term advantage from the institutional trading that is conducted by hedge funds and central banks. The movement of resources resulting from institutional trading has the potential to impact markets in the near term. Because they are employed as reserves for the financial system, gold and currency instruments are of special importance to central banks, which are the only institutions that may legally trade them.
Range Trader
Trading in a range is a common trading approach that helps traders recognize assets that have been overbought or oversold. These are also sometimes referred to as zones of support and resistance. Range traders look to purchase assets when they are oversold or at support levels. They then sell the same assets when they are overbought or at resistance levels.
Example: Range trader trade between the support and resistance area
The range trading method may be implemented at any time. However, it is at its most successful when the market is directionless. There is no clear trend that can be seen developing over the long run. On the other hand, this strategy is at its most ineffective in markets that are moving in a certain direction. This is especially when market directional bias is not taken into consideration.
When making investments with the goal of profiting from range-bound trading, these types of traders look for instruments with lower volatility. This is because more volatility implies that the market is experiencing turbulence. In a market that is moving in a tight range, an elevated price acts as a significant resistance level.
Carry Trader
When these types of traders engages in carry trading, they borrow money from one financial asset in order to purchase another financial asset. Carry trading is an extremely common practice in the foreign exchange market. When a trader borrows or sells one currency with a low-interest rate in order to acquire another currency with a higher interest rate, they are engaging in a situation known as a carry trade. While the trader is responsible for the payment of a low-interest rate on the borrowed currency, they are able to receive the return on a larger interest rate on the currency that they have acquired. The distinction between the two rates is referred to as the interest rate differential.
In its most basic form, the carry trade is borrowing money at a low cost from a nation that has a low-interest rate. They then investing that money in a nation that has a higher interest rate. Even though the Forex market is open 24 hours a day, 5 days a week, all open positions are formally closed at the conclusion of each trading day when using a broker to trade in the foreign exchange market. Your position will be closed and reopened by the broker. You will then either receive a credit or a debit. This will be equal to the difference in the overnight interest rate of the currency you sold and the currency you bought. This also depends on which decision the broker makes. This is often referred to as carrying a position over to the following day or rolling over a position.
The borrowing of one currency with a low-interest rate and the purchase of another currency with a higher interest rate is an example of a positive carry trade. The size of the trader’s position and the interest rate differential between the two currencies will determine the amount of interest rate payments they are entitled to earn after this point.
To engage in a negative carry trade, one must borrow a currency that has a high-interest rate. This is in order to purchase a currency that has a low-interest rate. The trader will suffer a loss because of the difference in interest rates. They will be required to make interest payments to retain the position. It is essential to keep in mind that any profits achieved via the use of a carry trade might be nullified. This is due to the decline in the price of the market in which the trader is investing.
On the other hand, any losses incurred as a result of a carry trade can be compensated for by an increase in the price of the market that you are purchasing. When using a carry trading strategy, you expose yourself to certain dangers. For instance, there is a rationale behind the fact that the interest rate in a nation that has a low-interest rate is so low. When the economy is having difficulty, it is typical for central banks to maintain interest rates low. This is in order to encourage individuals and businesses to borrow money, spend money, and invest money. By doing this, they help to stimulate economic activity. When the economy begins to recover again, the central bank may start to boost interest rates to prevent the economy from overheating. This will have an effect on any carry trades that are in place.
Carry trades expose investors to additional risks. One of which is the potential for the market they are investing in to either appreciate or depreciate. If a trader goes long or buys a market at a particular price, they may be eligible for a positive carry and get positive daily interest payments. Both of these outcomes are dependent on the market price. However, if they are sold at a lower price, the total loss on the investment may be more than the positive daily interest payments. This would result in a loss for the investment as a whole.
News Trader
The trading of news events is yet another important trading method. Richest Forex traders view the announcement of a country’s economic performance report as a chance to take positions. They do this on the potential outcomes of the announcement. Every weekday during the trading week, news trading events take place. These events overlap with other trading methods, such as day trading and swing trading. When financial news events are released, they could have an effect on the market for a short period of time. Nevertheless, over time, they tend to reflect a long-term trend in the economy. The amount of time necessary is dependent on the frequency of the trading events.
Example: CAD negative GDP news leads to 838 points fall in a short time
Nonetheless, effective risk management and extensive study are essential. They are responsible for enhancing one’s trading success. In conclusion, there are a few extra considerations to take into account. To prevent getting in over your head at the beginning, it is important to carefully select your goals. This is to ensure that they are attainable. It is also to comprehend the level of risk you are willing to take. You should only invest or trade with money that you can afford to lose. You should keep track of your performance using a trading journal. This will assist you in analyzing your success rate in comparison to your failure rate.
What Type of Trader Are You?
After going through the 6 main types of traders, have you figured out what type of trader you are? If you have, that’s great! You can go ahead and understand yourself much better so you can improve your trading. If you don’t believe you belong to any of the 6 types of traders, that’s also okay. This is because there are countless different types of traders. You may just be one of the many unique ones in the industry.