Trading styles
The number of trading styles and approaches to the market is probably the size of the amount of individals in the market. The trading styles, however, can be grouped into three main categories: short-term, medium-term and long-term.
Short-term, high frequency day trading
Short-term in forex trading involves holding a position for a very short period of time - a few seconds, a few minutes, rarely longer than an hour. The most important here are the pip fluctuations, because traders who follow that trading style, seek profits by repeatedly opening and closing positions after gaining a few pips. In the interbank market, this style is also called jobbing the market or scalping. Traders who follow this style are considered the fastest and most disciplined as rapid reactions and instantaneous decision-making are key to success in this trade.
Jobbing the market requires an intuitive approach as scalpers do not worry about fundamentals much. Many of them are exceptionally capable of sensing underlying current bias in the market. They do not care of currency pair movements as all they need is volatility, liquidity and ruthlessness in taking both profits and losses.
- Basic guidelines to follow when adopting this strategy:
- trade only most liquid currency pairs such as: EUR/USD, USD/JPY, EUR/GBP, EUR/JPY and EUR/CHF
- trade only during times of market interest and peak liqiudity
- focus on only one pair at a time
- preset default trade size so no specifying it on each deal is needed
- avoid trading around data releases
- look for brokerage firms that offer click-and-deal trading (no delays)
- adjust the risk and reward expectations.
Medium-term directional trading
Positions in this trading style are held from a few minutes to a few hours, but not longer than a day. Here the pips are also more important than the length of the time the position is open. This style seeks to get the overall direction right and profit from currency rate moves more. Statistically, the number of currency traders that follow this style is similar to short-time speculators as skills needed here are the same as in the scalping.
Medium-term traders usually pursue one of the following overall approaches as there is plenty of room for strategy combination:
- trading a view
- trading the technicals
- trading evets and data
- trading with the flow
Medium-term traders are normally looking to capture larger price movements (50-100 pips), but they usually are also happy to get smaller profits (80 or even less pips).
Long-term macroeconomic trading
This trading type is usually reserved for wealthy institutions. Long-term trading means holding positions for weeks, months and potentially for years at time which exposes the trader to short-term volatility that can overwhelm margin trading accounts rapidly.
There is another trading strategy called Carry trade strategy which has been described in a separate article.