What are the four trading styles?

As trading has progressed, traders have defaulted to a few styles, pushing them into the mainstream. And although every trader has their own specific style, they mostly fall into one of these categories.

The following text introduces each of these styles to help traders learn the most common ways of navigating the markets. Additionally, we will go into the specifics of each style to make it easier for newer traders to recognise which style fits their personalities and goals the best.

Scalping

Scalping is by far the fastest trading method. It’s a style that involves placing many small trades and trying to capitalise on a high quantity of small wins. As such, it has a very involved trading routine, with traders needing to actively engage with the markets for as long as their trading window lasts.

Technically, scalping falls under day trading. However, due to its popularity, especially in forex and CFD spaces, it has branched off and become its own strategy in the eyes of many. Even within scalping, there are many different ways to approach the market. For instance, some prefer to only scalp in either bull or bear markets, or around big news releases.

Regardless of style, scalpers need specific conditions to make their routine work. For starters, a spread-based cost structure, preferably with tight spreads. High flat costs on individual trades are exactly the opposite of what scalpers target since they erase any profit the smaller trades may have.

Additionally, scalpers are very meticulous with their trades. In other words, they don’t only look for a specific win percentage, they target particular pips. Because of this, keeping up with multiple assets, on top of being mentally intensive, is also physically difficult. Traders need quick reactions to switch between their assets and get in and out at the proper times.

Along the same line, traders need a solid platform that runs smoothly and has low latency. Some even run private servers to eliminate even the slightest bit of delay.

Scalping is a great way of trading for those who want to be highly involved and keep a high pace. However, it’s also extremely straining. Generally, scalpers only trade in short bursts to minimise mental fatigue. Burnout is a huge risk for scalping, so those who are looking into the style should be sure to leave enough room for mental recuperation in their schedules.

Day trading

This style has a longer time orientation than scalping while retaining a fairly sharp pace. Day traders aim to open and close trades within a single day. As such, a single trade can last minutes to hours, depending on the trader’s goals and the market conditions.

This style can’t ride out longer trends, and that may seem like a downside. However, it makes up for that with two important pluses.

First, it avoids overnight risk. A day trader will never get caught off guard by wild swings when markets close or open because, quite simply, they don’t have any positions open at that time. And since these are when market risk is highest, day traders can avoid a lot of harmful market effects.

The other upside is more straightforward, and it doesn’t have to do with the market itself. Namely, most forex dan CFD brokers charge overnight fees. These charges vary in size, but traders who hold positions for multiple days will have to pay them. The day trader’s solution is simple; don’t hold a trade for longer than a day.

Now, there are many tactics that fall under day trading, and the experience between them can be quite different. Some ride out trends, others look for reversals or rely on indicators to identify trend breakouts or breakdowns. However, they all share a similar idea around the optimal time to hold a trade.

Day trading is good for those who want something fast-paced but find scalping too intense. Every trading day is separate, no positions carry through, and traders have easily quantifiable results at the end of each trading day. However, the downside is that the style requires a lot of involvement, and can’t capitalise on long-term movements.

Swing trading

The third type looks further into the future. Swing traders hold trades from days to weeks, but don’t bank on a basically indefinite period.

Essentially, swing traders are still focused on trends. They don’t aim to accrue value on slowly gaining assets but capitalise on a mid-duration move from a particular instrument.

This style requires a much more tactical approach than the previous two. Since positions are usually opened and closed relatively closely with scalping and day trading, a single trade doesn’t usually carry much risk. As such, even a sloppy or impulsive move is unlikely to cause significant damage to a portfolio or a trader’s finances.

However, since swing traders usually make less trades, they take larger positions. As such, even a single position going wrong can cost the trader a lot of money. And since these traders hold their positions through the riskiest parts of the trading day (opening and closing), avoiding mistakes is much harder.

As such, swing traders don’t spend a lot of time on their actual trading routine. Instead, they invest that time in creating a trade strategy that will allow them to correctly navigate market situations.

Fundamental research, knowing the asset and how it relates to the broader market, and following news surrounding these is crucial for swing traders. It’s much more vital to have a strong knowledge core with this trading style than the previous ones.

However, for traders who put research first, swing trading can be immensely rewarding. Multi-day trends can often have high yield, but knowing when to get in and out remains crucial.

Position trading

This is by far the most long-term-oriented of all trading styles. In essence, position traders don’t have a specified time that they want to get out of their positions. They want to put down their capital and allow it to grow indefinitely, or until they can transfer it to another investment.

As such, strong fundamentals are necessary. Position traders only trade assets they trust will grow over a long period of time. As such, what’s currently happening doesn’t really matter in the long run.

Position traders like assets like indices and ETFs. Since these take whole segments of strong economies, it’s highly likely that they’ll grow over time. The growth won’t be as exponential as it can be with other assets, but that’s fine, since position traders are banking on years instead of months or days.

The biggest issue is that this is difficult to predict. Outside of indices and ETFs, there are few assets that suit position traders well. Some opt for stocks in companies they trust, or giants like Meta and Amazon. However, while stocks of these companies are relatively secure investments, they are still prone to huge changes in value.

Another significant issue position traders face is suffering from market circumstances. For instance, if the US is in a bear market, position traders may see their entire portfolio turn red, which is nerve-wracking. Position trading requires knowledge, research, trust, capital, and most importantly patience.

It’s normal for position traders to only place a few large trades per year. And while their growth is gradual, these traders mostly remain stress-free since temporary setbacks aren’t a big deal when you’re looking years into the future.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.