There are four main types of forex traders in the financial markets. The day traders, position traders, swing traders, and scalpers. Finding out which kind you are is a great way to know what type of technique and tools you will need. As you do this, consider reading through our forex broker reviews to find the best forex broker for you.
What is the difference between a good trader and a great one? Well, if you ask the expert forex traders, they will tell you that it is intelligence, guts, timing, and instincts. You will need to be equipped with all of these things when you get into the market.
More importantly, you will have to make sure that you know which type of trader you are. Just as we have these types of forex traders, so do we have different time frames that help forex traders to develop a strategy that works best for them.
While we consider all this, timing is one of the things that helps forex traders to be able to dominate in the markets. You will need to be able to define yourself accurately to know what you need to do to make returns.
To stand out from the multitude of forex traders, you will need to be able to have these items:
- Position leveraging
- An understanding of the nuances of the currency pairs
- The effects of schedules and sudden news releases that shift the markets
Because of these things, you will discover that timing has to factor into what you do a lot. Novice forex traders tend to ignore timing even when the most experienced forex traders insist that it is the difference between their successes and failures.
So, let’s get to it and describe the types so you know what the categories of forex traders are and which one would be the most suitable type for you.
The forex day trader is one who closes all their trading positions at the end of every trading day and makes sure that none of them stays open overnight. Day traders function well when they have extensive knowledge and experience of what their particular brand of trading needs.
When it comes to day traders, there are a variety of methods that one can use when they want to get a clear shot at success. Some of the forex traders trade securities, using technical indicators and analysis in the calculation of when they should enter or exit the market.
This is the part where instinct comes in. It takes time to develop them. It also requires plenty of exposure to make sure that you can feel the trade you want to make.
Generally speaking, the day traders operate using the price action characteristics, to influence whether they buy, sell or hold their trading positions. They leave the forex fundamental analysis to the other forex traders. It does not contribute much when your trades are opened and closed on the same day.
What matters is:
- The price volatility
- Average day range
For day traders, these two things are essential in making the decisions that they make. Before a day trader can get started on a trade, they have to be able to ensure that one crucial thing is in order;
- The security needs to have sufficient price movement.
For a day trader, the profits come from the price movement of securities. The trading is established on the strategy where you enter and exit a trader position at a fast rate. This is why two things are very crucial for a day trader:
With these in place, everything moves well. However, if the financial securities have a small daily range or volume, then they are of no interest to a day trader.
Another part of day trading is that the forex traders need to focus on events that have short term forex market shifts. This is why trading the news is a big part of what day traders do. They trade by keeping their eye on any news that might cause a move on the financial securities that they are keeping an eye on.
The information that day traders get from schedules forex economic news releases like interest rates, corporate earnings, and stats from a country, helps them know when to be there to make a trade.
The economic expectations outlined here are the reason why forex traders experience significant moves in the forex market. When expectations are met or exceeded, the day traders make money.
So, is a day trader what you might be? Let’s find out after we finish the other three.
Position traders, unlike day traders, tend to hold a trade position for a long time when trading securities in the forex market. They could hold the position for weeks, months and even in some cases, years.
These traders are the complete opposite of day traders. They are not concerned with the short-term fluctuations that happen every day. The economic news releases that happen daily do not interest them. They are not even active traders. They might check in on their position once in a while to assess that everything is on track.
In a year, they initiate very few trade positions. For position traders, their eyes are kept on the monthly and weekly analyses. That is the kind of action the position traders want to see so that they can ascertain that the long-term trend they are looking at, is moving as they predicted.
The profits that the position traders make comes from primary trends. The trades take into consideration both forex fundamental and forex technical analysis. The trading indicators give position traders a better way to evaluate the forex market so that they can make better trading decisions that are in line with their strategy to stay in a position for a long time.
The total evaluation of the financial assets in question needs to be done correctly or risk losing money after waiting for a long time to make returns.
For the forex swing traders, the profits and returns come from holding a trading position overnight or for several weeks. They are slightly less extreme, in terms of how long they wait, when compared to position traders.
With swing traders, the fundamental analysis is most crucial. They also need to take into consideration the following things:
- The intrinsic value of security
- The price trends
- The patterns
- Technical analysis
With this in hand, swing traders then search for the short-term price momentum and then decide that. Swing traders identify security that can move in a short time frame. The goal of swing trading is to trade on significant price movements in the forex market.
The swing traders do this daily by spending weeks or months, monitoring particular securities in the hopes that, in its trajectory, it is bound to have a significant price movement.
Swing traders will buy securities when the market is moving in an upside swing and sell securities when the swing comes to a halt, stops, or tops out. They focus on a specific asset. With that singular focus on an asset, they have the chance to understand the movement that takes place, as concerns the particular asset.
Swing trading brings with it many advantages. If forex traders get very good at it, they end up making higher returns and profits than they would if they bought and held. This is the kind of trading that is best for those who do it for a living.
In addition to all the returns you get here and how high they can be, it carries less risk than other forms of trading. Furthermore, it does not involve gluing your eyes to the screen, watching the markets every minute. You can be a little passive and not have to keep up with the real-time data continually.
Scalpers are the type of forex traders who hold a trade position for a short time in an attempt to make profits from this brief hold. The scalpers buy and sell securities multiple times in a single trading day.
The mindset of scalpers is that you can make a lot of profit by creating little bits of profit throughout the day. Let's say you make $50 on one trade and then do this about 10 times in a day. You will close the day with about $500.
The mindset of scalpers is also built on the assumptions that short holds are less risky, have small losses and will ensure a certain kind of consistency that the other trading strategies cannot offer.
Scalpers use a manual and automated trading system on several forex trading platforms. The goal is usually to develop functioning strategies that bring in profits from bid and ask spreads. With the manual system of trading, the scalpers will sit in front of a computer and watching the changes, making the trades and hopefully cashing out quickly.
When it comes to automated trading, the forex traders will just set the rules and guidelines for the computer to use in making trades on behalf of the scalpers.
With the forex scalping strategy, one can get more profits when the market is volatile and always moving. However, there is a particular type of risk involved when you join the scalpers strategy. Once the scalper enters a trade position that they have difficulty getting out of, they might have problems because this could lead to a loss of profits.
It sometimes happens so, keep that in mind.
Additional Information To Keep In Mind
We have talked about the four significant types of forex traders that you will encounter in the market. Now, we need you to know that even within these categories, several factors contribute to success.
Just knowing the time frame when you need to trade based on the type of trader you are, is not enough. You need to know the things that affect the forex traders on a personal level. Here is information that will benefit you greatly as you start figuring this out:
Leverage is indeed a double-edged sword that will either make it hard or easy for you to do what you need to do, to make more returns. The forex market has relatively small movements and fluctuations in price. This means that if you do not have leverage, you are a swordsman without a sword.
To put this in words you will get, without the proper tools, even a pro can do nothing. You cannot capitalize on opportunity without leverage. Let’s take swing traders, for example. Their positions, just like with position traders, stay open for long, and sometimes, you have to feel the pain before you can feel the soothing effects of the profits pill.
Leverage allows you to make a lot using very little, and to lose a lot, even though you had placed very little on the line. It can make or destroy you. Use it wisely.
- The Volatility of Currency Pairs
It is good to know how much you could lose in a trade, but it is also essential for you to understand how fast you can lose that money. Different time frames will require you to consider different pairs.
GBP/JPY sometimes fluctuates 100 pips in an hour. Knowing that as a part of the scalpers camp is excellent, but if you are doing swing trading, you probably do not want to be caught in a wrong position like this. For that reason, consider the volatility concerning what you do, to make the right decision.
- News Releases
Finally, any of the traders in any of the categories that we have discussed here need to be aware of all news; scheduled, and unscheduled. It will make it easy for you to either see an opportunity or miss it. It will also allow you to adjust your position and stay away from preventable losses.
The forex market is the largest financial market in the world. As one of the many forex traders, you have to decide what you are going to do and how you are going to ensure that you do it well.
As you have seen, we have the day trader, the position traders, the swing traders, and the scalpers. It is all up to you to find out which one of these is the most suitable for you.
As you do this, you need to keep in mind that the best way to get to the top is to have everything in order. One of the things you cannot afford to get wrong is the broker. We have forex broker reviews that will help you get the best forex broker for you.
These types of traders trade the forex market in different ways and utilize different software. Different traders need different strategies. If you know that, you will know not to do the wrong thing.
Good luck finding out what you are good at doing. So, before we get into all this, you need to know one thing; it is almost always about time frames. That is how you get to know what kind of trader you are and what is required of you, to make it in your particular chosen field.
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