Trading syles

One of the main questions to consider as a beginner trader is which trading style to adopt? The trading style depends on your schedule, on the size of your equity, on the technology available, and on your personal preferences. You should choose a style that is the most comfortable for you.

There are several styles promising high probability to make profit, but the return is low relative to the equity. And there are styles which brings you profit only occasionally, but this profit will be significant relative to the equity.

Trading styles differ in the following attributions:

  • Frequency of trades,
  • lifetime of positions,
  • size of time frame needed to identify trades,
  • risk and money management (leverage, lot size, profit target, and stop loss levels).

Your task is to develop your unique trading style that fits you well. The styles introduced below are guidelines to develop your own. The closer the style is to your personality and philosophy, the better you can apply it. Evaluate your personal values, attitude, lifestyle, and limits to create your own trading style.

Is it recommended for beginners?*

Not every style is recommended for beginner traders. Generally, the narrower the time horizon you trade in, the higher the technology expectations and the higher the equity required. These trades require a special fee structure. You should start your career with slower and calmer trading styles.

End of Day

Position

Swing

Technical

Macro

Trend

Daytrade

News

Scalp

RECOMMENDED

NOT RECOMMENDED

*The categorisation only reflects the author’s personal view 

The trading style is mainly determined by the time frame of the positions and the trading frequency.

Time horizon

End of Day

Macro

Position

Trend

Swing

Technical

Daytrade

News

Scalp

MN Monthly

X

X

X

X

         

W1 Weekly

X

X

X

X

X

       

D1 Daily

X

X

X

X

X

X

     

H4 4 Hours

     

X

X

X

     

H1 1 Hours

     

X

X

X

X

   

M30 30 Minutes

         

X

X

   

M15 15 Minutes

         

X

X

X

 

M5 5 Minutes

         

X

X

X

X

M1 1 Minutes

         

X

X

X

X

*The categorisation only reflects the author’s personal view

Short-term

Medium-term

Long-term

Traders usually use minutes candles. They close the positions by the end of the day.

Traders use hourly and daily candles. Positions last from a few days up to a few weeks.

Traders use daily or weekly candles. The length of positions ranges from a few weeks up to several months (or even some years).

ADVENTAGES

  • Several trading opportunities.
  • Smaller chance of a lossmaking month.
  • No overnight position.
  • More opportunities to trade.
  • Smaller chance of a lossmaking month.
  • Not only 1-2 positions.
  • Do not have to constantly pay attention to prices.
  • Less transactions mean less spread fee is paid.

DISADVENTAGES

  • Higher transaction fees.
  • The frequent trades are difficult to handle mentally.
  • Limited profits since the positions are closed at the end of the day.
  • Higher overall transaction fees.
  • Risks of holding positions overnight.
  • Large fluctuations which require large stops.
  • Usually 1-2 positions per year which requires patience.
  • Frequent lossmaking months.

 

End of Day (EOD)

What is End of Day trading?

Long-term trading style, popular amongst those who work full-time. The market is analysed, and the pending orders are managed and modified on a daily or weekly basis. Recommended for those who are busy and cannot concentrate solely on trading.

Is it recommended for beginners?

EOD trading is recommended for beginners because trades occurs rarely. Most beginners learn how to trade while in school or working, therefore this style is ideal. It is possible to avoid stress with a well-chosen risk management strategy, and you will have enough time to plan your decisions.  

How much starting capital is recommended?

The capital requirements are rather low, since this is a longer-term strategy. You will not trade within the day; therefore, you don’t have to comply with the USD 25,000 daytrading limit. A few hundred dollars are enough to practice trading leveraged CFD products. You should increase the capital to a few thousand dollars if you want to see significant results. In case of stock, you should have around USD 10,000 on your account (or more), due to the diversification.

 

Macro

What is Macro trading?

The strength - or weakness - of an instrumentum is based on fundamental information and/or economic models in order to forecast future price movements. Fundamental analysis concentrates on supply-demand factors determining the price. It forecasts the future price movements or uses related forecasts. Thus, fundamental analysis examines the underlying reason of future price changes, draws conclusions from patterns, and gives support to current decisions. It looks for the intrinsic value of a given instrument. A fundamental analyst says that the price is the discounted value of the future sum of money. 

Is it recommended for beginners?

Fundamental analysis requires high-level economic knowledge. You will not understand the economic processes and connections without experience. Hence, macro trading is not recommended for beginners. It is much easier to base your trades on technical analysis and you will have a quicker efficiency feedback. 

How much starting capital is recommended?

Since the effect of fundamental processes are usually visible slower and gradually, this trading style does not require large equity. With an account of USD 10,000 (for diversification purposes) you can already start trading and you can earn long-term profits.

 

Position

What is position trading?

A position trader plans his positions for longer term, which interval could be weeks, months, and also several years (Buy&Hold strategy). This trading style does not count with short-term price fluctuations, because it believes that the long-term horizon of the investment remains balanced. Unimportant news or rumours do not influence the trader. Position trader relies on fundaments, but his decision is also based on technical analysis. He usually enters the market with a limit order and spends less time on monitoring the market. More active traders build positions - they open positions several times in a trend to modify the average price. Due to the long-term nature of the investment, larger price fluctuations are tolerated. The trader must pay attention to the leverage and the size of the position. 

Is it recommended for beginners?

It depends on several aspects. In this style the fundamental and technical analysis is combined. You can earn valuable experience when using this style. It may be difficult for beginners, but you can be successful with enough practice and patience. 

How much starting capital is recommended?

Buy and Hold strategies are rather investments than trading. In short-term you shouldn’t expect results with a USD 10,000 account. However, in long-term this amount is a good start.

 

Trend

What is trend trading?

A trend trader first identifies the trend and then opens a position in the trend’s direction. As the saying goes: "Trend is my friend". Traditionally trend traders were long-term investors, but nowadays shorter-term trend traders also belong to this category. This strategy cannot be efficiently traded on sideway markets; therefore, it is essential to recognise the current trend. 

Is it recommended for beginners?

It is not recommended for beginners as the first trading style. It may seem simple, but identifying trends is quite difficult and requires experience. 

How much starting capital is recommended?

Short-term trading requires larger equity, while smaller account size is enough for long-term trading. You can start trading with a few thousand dollars, but you will have to increase this amount if you would like to earn significant returns.

Swing

What is swing trading?

One of the most popular strategies, most traders start their career with this strategy. A Swing trader opens a position after the expected movement has happened. They try to trade a smaller part of a bigger trend moves (few days or weeks). The fundamental analysis is needed for Swing trading. The advantage of small frequency trading is the reduced transaction costs (compared to daytrading). However, the swap increases the costs what could be relative low to the possible profits. A successful Swing trader can identify trend reversals and try to ride the trend as long as possible and close the position at the first trend reversal signal. This style requires more attention to monitor the open positions. 

Is it recommended for beginners?

Absolutely. This is one of the most popular trading style. You don’t have to hurry, but have to keep the stock rotation on a sufficient level. This motivates the trader to continuously work which will bring successful trades sooner. It is possible to use this style while working, but it requires a strict schedule. 

How much starting capital is recommended?

The equity requirement increases, when the time spent in one position decreases. Minimum USD 10,000 is recommended on your account. It may happen that you have to close a position within a day, therefore it is an advantage if you have at least USD 25,000 deposited on your account.

 

Technical

What is technical trading?

Technical analysis draws conclusions from the historical movement of prices to understand present and predict future movements. Technical analysis examines the price (trends, technical levels, formations, Japanese candles, indicators), the trading volume, and the market mood indicators. A technical trader determines the entry, the management, and the exit with technical analysis tools. The analysis is used in any time horizon, but usually is applied for day trade. Technical analysis has three basic assumptions:

  • Every news is built in the price,
  • prices move in trends,
  • history repeats itself. 

Is it recommended for beginners? 

Yes. It gives you the opportunity to practice what you’ve learnt about technical analysis. You can use the analysis tools in several time horizons, providing you an ideal place to practice and to deepen your knowledge. 

How much starting capital is recommended? 

It is not possible to define a certain amount, since it can be applied on several time horizons successfully. There is one principle you should be aware of: the shorter time horizon you trade in, the higher amount should be deposited on your account.

Daytrade

What is daytrade?

A Daytrader is someone who never leaves any position open overnight (Scalp is a subcategory of this style). Daytraders go for small profits and quick positions but repeat this kind of trades several times a day. They do not trade continuously during the whole day, periods with low volatility are generally skipped. Risk management makes the usage of stops necessary; positions are closed quickly if prices move in the opposite direction. They usually trade larger amounts. It is a stressful style which requires strong concentration, awareness, and excellent reflexes.  

Is it recommended for beginners?

Several beginners prefer to start with daytrading, because it gives them the feeling of real trading. You have to sit in front of your monitor for hours and it can give you significant results even in short term. However, in my opinion, daytrading is not the optimal style to start a trading career. It is stressful, tiring, and requires knowledge beyond technical analysis (depth of market, time&sales). You need a special technical environment and fee structure for daytrading, which is not always available for beginners. Do not jump into daytrading, start with a larger time horizon, and do not hasten your decisions. 

How much starting capital is recommended?

In the US markets, daytrading requires an account with at least USD 25,000. It is easy to lose your money with a smaller account due to frequently position opening and closing. In case of forex trading this is lower, since you can work with higher leverage. Daytrade is not recommended for CFDs, because of the high commissions.

News

What is news trading?

Significant announcements on the markets and publication of macroeconomic data can result large price movements. News trading is a type of daytrading, but after the announcement of news it may be possible to hold the positions in longer term. News traders must pay attention to several factors. Below a few examples are mentioned.

  • Unpredictable market environment, since good news can also trigger negative reaction and vice versa. It is difficult to be prepared.
  • Volatility increases, liquidity decreases, the market is hectic. Liquidity providers cancel a certain part of their orders in this case. The execution of orders can be different in time, slippage is large and there are more re-quotes.
  • Wide spreads are typical in this period, the difference between bid and ask prices increase, which is mainly driven by the lack of liquidity.
  • Stop level is not safe when news and data appear. Sudden significant price movement can result gaps between the candles on less liquid markets. If the spot price passes the Stop price, then it either won’t be executed or it will get executed with larger losses than planned.
  • The demand for margin increases and most brokers increase the margin requirement even before the news. This protects both the broker and the client.
  • The counterparty risk increases as the broker may go bankrupt without hedging the client’s positions.

Is it recommended for beginners?

Absolutely not. News trading requires experience and you must know the effect of economic processes on the different currencies. You should not start with this style at the begging of your trading career. 

How much starting capital is recommended?

You need at least USD 25,000 for stock trading and even more for futures trading. This does not mean you will use all your equity in one position, but the rules of daytrading (pattern day trader) require this amount on your account. News can cause prices to change significantly in a very short period of time. Therefore, risk management techniques are inevitable for news trading. This requirement makes this style even less optimal for beginners.

Scalp

What is scalp trading?

The aim of scalping is to generate profit from several small trades. It is similar to Day trade, but a scalper holds a position on a shorter time frame. The average “lifetime” of a position is less than one minute. Scalp traders can execute hundreds of orders within one day. They try to earn small profits with low risk, they immediately close the positions when it generates a small loss. Most traders use high leverage for their trades which makes the exit strategy strict, proper management is required for correct execution. I recommend to scalp only where the trading is regulated. If the broker makes the client wait after the order was given (Last Look) or the spreads are skewed, then this strategy only brings profit to the broker.

Adventages

  • High profit rate,
  • low market risk exposure, since the positions are closed quickly (thus the chance for large price movements is low),
  • effective use of capital with minimal risk per transaction,
  • more market situations, more opportunities for traders,
  • opportunity to increase margin and minimizing risks,
  • the fundamental knowledge is not necessary, but traders must pay attention to announcements.

Disadvantages

  • Bad ratio of profit/loss, one bad trade can take the daily or even weekly profit,
  • takes more time and requires more attention, the trader spends the whole day with trading,
  • high costs, the spread is not negligible,
  • stressful trading style, requires high level of attention and precision,
  • requires complex knowledge of the market structure and order types,
  • only a few brokers provide adequate conditions for scalp trading. 

Is it recommended for beginners?

Absolutely not. Scalping requires high focus, lots of experience, and is very stressful. This style requires adequate technology, IT background, and fee structure. You must have a deeper knowledge of all order types, the order book, and the time of sales. This knowledge is most probably beyond the capabilities of beginner traders. 

How much starting capital is recommended?

You need at least USD 30,000 due to the trades within one day. Traders open positions for very short time, therefore the capital requirements are much higher. The profit/loss relative to the capital is higher in this style due to the quick rotation of positions.

 

 

 

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