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How To Start Trading?

Lesson 8: Trading Styles

Forex trading brings together a crowd of completely different people – diverse professional background, unique personalities, unlike financial and marital status, location, gender, age, political and religious preferences, and finally different trading styles. What are those trading styles? Which one is most profitable? How to figure out which style suits you best?

You can choose to be Scalper, Swing trader or Position trader. To say for sure which one is most profitable is impossible, because most professional traders mix it all up. The trick is to figure out when is the right time to scalp, to swing and when it is the best to run a position.

Let’s look at each trading style in details:

1. Scalping

Forex scalping tactic is the combination of high leverage and short term trade. The basic idea behind scalping is to make profits on tiny price movements, sometimes no more than 3 pips. A scalper has to focus on price action, join and get out of trades very quickly, gain each time about 5-10 pips and slowly double or triple the account.

Forex scalping, used correctly, is one of the trading styles with minimum risk involved. If you want to adopt scalping to your trading strategy, here are some things you should consider:

· Forex Broker which Supports Scalping

Many forex brokers do not allow scalp trading, since entering and exiting trades causes a broker to lose money. Take an extra time to find out whether your online broker supports scalping.

· Strict Exit Strategy (both good and bad trades)

Stick to the plan and be disciplined. Staying in the trade “just a little bit more” can bring catastrophic results.

· High Leverage

Scalper uses higher than normal leverage, however keep in mind that forex market can easily move against you and cause significant account losses.

· Automated scalping strategy

Since scalping involves short stays in the market (no longer than several minutes), a lot of scalpers automate their set of rules to ensure the speed and consistency. Some forex trading platforms, such as MetaTrader 4, allow executing your system on every tick.

· Support and Resistance Levels

Find support/resistance levels that have worked on several occasions in the past (at new chart highs or lows).

· Look for Momentum

Is the price moving strongly towards either support or resistance level? Is there confirmation that the price momentum is about to turn? In order to get a confirmation that the price momentum won’t take out support or resistance, use stochastic indicator. Stochastic lines will show you which way the market is trending. To read the hint right and take a trade, look for stochastic lines which cross each other and point either up (showing support has won!) or pointing down (showing resistance has won!).

2. Position Trading

Position trading involves entering a position and holding it for quite a while (days, weeks, months or even years), or until the reason why you entered a trade in the first place (usually based on fundamental analysis) is unchanged.

When position trading, focus on:

· Average Trades

Weekly 3-bar pattern is a great strategy for forex position trading, used on daily and weekly frames.

· Decisions

Base your trading decision on fundamental data. The basic fundamental analysis includes political and economic changes. Position trader should get information about unemployment forecasts, economic policies, inflation, political principles, and growth rates.

· Position Size

A size position in position trading should be rather small, since you have to be able to endure daily price movements. To make this happen, the leverage used in position trading has to be rather small. Since it is possible for a currency pair to jump up and down as much as 3% in just a day, your account will be empty if your leverage preference is more than 1:30.

· Trading Frequency

In position trading, the number of trades are kept to minimum. In a way, a long term position can cause a forex trading to lose profitable opportunities forex market presents daily, however less trades somewhat decreases the number of losses.

· Time

Since position trading is all about long-term profits, you might come to the conclusion that position trader has more free time. That isn’t exactly so, since the considerable amount of time needs to be invested in order to analyze and make decisions based on fundamental data. You need to become an expert in economics and politics.

· Market Trend and Volatility

Once you gain experience in reading forex news and analysis, it will be easier to understand where the market is heading to. It is also crucial to understand the consequences of each trading decision. Forex market is at times volatile and creates an uncertainty. When you trade long term positions, it is wise to avoid highly volatile periods and check out technical indicators to see when the volatility calms down.

3. Swing Trading

Forex swing trading is all about making profits from major trend movements. It is rather fast approach to learn the right from wrong and stay disciplined.

Swing trading involves the following:

· Duration and Frequency

Despite the fact that swing traders sometimes speculate on short-term currency price movements, overall they rather hold open positions for more than 24 hours. When swing trading, you have to place a trade only when a real opportunity strikes and hold it as long as necessary (few hours or even few days).

· Rollover fees

Swing trader often holds position overnight, therefore the rollover fee is charged. It is, however, rather small disadvantage compared to spread and potential profit.

· Analysis

Swing traders capture large opportunities, and therefore have to concentrate on long-term fundamental and technical analysis in order to spot a good entry.

· Support and Resistance

If swing trading is your style, you have to find (via both daily and weekly charts) valid support and resistance and focus on those points inside the trend. A good sign is when the points are on more than 3 different time-frame charts. Once you have the right support and resistance points, you can apply the trading signal.

· Confirmation

Make sure to get a confirmation via forex indicators such as momentum oscillators: stochastic and RSI (relative strength index). Keep in mind that trading without stochastic validation is not recommended.

· Stop and Target Points

Swing trading involves setting target points and stop points. Since forex swing trading is all about small fast gains, target point is important in order to gain the profit the moment the target is reached. Don’t wait out “a little bit longer” – you will most definitely lose.

No matter what kind of trader you choose to be, each style is unique. While every forex trading style has its own nuances, it is necessary to master them all. A successful forex trader knows how and when to imply each style without getting carried away.