Since online FX Trading was first introduced in the late 1990’s, there has been a virtual explosion of forex retail accounts. Hundreds of accounts have opened around the world and thousands of small cap investors have attempted to trade this market. One of the strong draws of the FX Market is the fact it is a decentralized interbank market which runs 24 hours a day, 5 days per week. The 24 hour nature of the FX Market makes it possible for traders to engage in numerous styles of trading.
A powerful key to successful trading is finding a methodology or approach to the market that is strongly correlated with one’s personal psychological and emotional make-up and that also blends well with one’s lifestyle. There are several pros and cons to each trading methodology. Finding the right fit is of the utmost importance.
Day Trading
Day trading is typically defined as the opening and closing of positions within a single trading day. Positions are rarely, if ever held overnight. Rather at the end of each trading session, the trader is completely flat, or has no open positions. Due to the fact that positions are closed at the end of each trading session, this methodology greatly reduces the risk of being exposed to unforeseen new events that happen randomly. For example, if a country is suddenly hit with a major catastrophe that sends financial markets into turmoil, a day trader can simply close out any open positions at a very small loss, if any at all, while longer-term methodologies do not have this liberty. Day trading is typically more attractive to those who want to be active and “in the market.” There is a certain rush associated with taking numerous trades throughout a trading day, and day trading will oftentimes appeal to personality types that are driven in this manner. However, day trading is typically considered a more difficult feat for several reasons when compared to longer-term methodologies. First, transaction costs can cut away at trading profits over time. Second, the stress associated with watching the second by second account balance rise and fall can be very taxing on a person. An extremely strong emotional make-up is essential to day-trading success.
Swing Trading
Swing Trading is typically concerned with trading market reversals at swing points on higher timeframes such as the 4 Hour, Daily, Weekly, and Monthly Charts. These traders will generally have positions open for anywhere from 1-30 days. Swing trading is still considered short to intermediate term, but it carries with it several benefits in comparison to day trading. First of all, due to the nature of holding a trade for a longer period of time, the stress level a trader experiences tends to be much lower with this approach. Second of all, a trader need not be in front of his computer except for a few hours a week to conduct analysis and manage any open trades. This style of trading blends well with people who still have full-time jobs. There are greater risks associated with swing trading, however. First of all, since trades are held overnight, open trades are subject to random news events that have dramatic and quick impact on the market. Since these traders are not in front of their computers for long stretches, it is uncommon for them to be able to close open positions if a surprise event begins to move their position against them. Transaction costs also affect overall profitability much less than daytrading due to the fewer amount of trades taken.
Position Trading
Position trading is also referred to as a buy and hold trading approach. In this methodology, after in-depth analysis, traders take a position in the market and hold this position for a minimum of several weeks, and up to several months or even years. This type of trading is the least time consuming, which is great for people who have busy lifestyles and want to engage in financial markets, but don’t have more than a few hours per week to spend engaged in trading. In fact, once positions are on, an hour or less per week is enough time to monitor trades and make any needed adjustments. Transaction costs will be very low with this methodology as well; however, at times a trader may experience large drawdowns before price continues to trend in the intended direction. This can be very difficult psychologically. The FX Market and Forex News is commonly known as a strong trending market, so those drawn to position trading may find the FX Market to be a perfect place. A simple glance over historical charts will show how strong and long trends tend to be in the FX Market.
