Trading Styles - Scalping & Day Trading

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Introduction

As part of your Trading Plan you must determine what kind of trader you are going to be.  Are you going to be a Scalper a Swinger, or are you going to mix Position Trading with a wee bit of Day Trading?  You need to pick one, or a combination, that's going to suit your personality and psychological make-up.  Are you aggressive or relaxed?  Do you feel uneasy while in losing positions, or don't you mind holding small losing positions if long-term averages are going to go your way?  All these things need to be considered.

A typical scenario is that a new trader reads a little bit about trading forex, finds a system online that claims to make money quickly, and then jumps right into trading because he feels like he's got enough of a background to make millions of dollars.  Unfortunately after the "honeymoon" period is over and the excitement settles down, this new trader now realizes that trading isn't as easy as he thought. The system doesn't seem to be working like it claimed it would and he has no idea why the market is doing what it's doing.  The most important thing you can invest in as a trader is your TIME! Every single trading day is a learning experience and if you stop learning, then you will never become a truly successful trader.

Scalping

This is a high paced type of trading where positions are held for a matter of seconds or minutes.  Scalpers aim to grab small amounts of pips many times during the day and requires intense focus and quick thinking to be successful.  It's best suited to those traders who can spend hours per day pouring over charts with their finger on the button.

Reasons to Scalp:
  • You like intense quick excitement
  • You can sit at your desk several hours at a time
  • You are impatient
  • You can change direction quickly
  • You think on your feet
Reasons not to Scalp:
  • You stress easily when faced with fast moving decisions
  • You have time constraints
  • You like to analyse the market prior to entering
Scalping is best suited under the following conditions:
  • Trade the most liquid markets with the tightest spreads.  Spreads are a cost, so EUR/USD, GBP/USD, USD/CHF and USD/JPY will be the most cost effective pairs to trade.
  • Trade the most liquid times of day.  The busiest times of the day are the most liquid.  The below table highlights the busiest times:
 New York ESTLondon, Dublin GMTFrankfurt, Paris CETBeijing, Hong KongMel, Sydney
02:00 to 04:00am07:00 to 09:00am        08:00 to 10:00am15:00 to 17:0018:00 to 20:00
08:00 to 12 noon13:00 to 17:0014:00 to 18:0021:00 to 01:00am00:00 to 04:00am
  • Trade few pairs first to get used to the pace
  • Don't forget money management
  • Know your News releases - They can move the market significantly
Day Trading

Day Trading is another short term trading style.  It lasts longer than Scalping - you're usually in and out of one or two trades a day.  Day traders don't like to hold overnight positions, which may go against them.  Some markets aren't 24 hours, so you'll find it impossible to close a trade in some stocks and futures out with market hours. Volatility is key here.  They prefer to do their homework on a couple of markets, execute at the start of their trading day and at the end of it.  

Reasons to Day Trade:
  • You like the certainty of knowing your winning/losing positions on a daily basis.
  • You prefer to analyse markets in great depth first
  • You like to keep abreast of economic news and releases, so you can anticipate the market move
  • You have time on your hands and you'd like to trade full-time
Reasons not to Day Trade:
  • If you think this is a get rich quick activity - DON'T TRADE.
  • You don't like to hold positions all day
  • You don't have time for market analysis
  • You have a job and can't devote the time needed to Day Trade.  Having a Full-time job and day trading isn't a good combo.  You'll find it hard to focus your energy during market opening hours.  A Part-time job and day trading may be a better combination.
  • There are larger transaction costs involved in day trading since you are executing trades on a daily basis.
Day Trading Styles

There are three main types of Day Trading
Trading the Trend

We've talked about this at great length throughout this course.  It's the basis of most strategies and probably the most popular way to trade.  It requires Time Frame Analysis to determine the larger trend, analysing support and resistance levels and utilising all the technical indicators and charting tools that we've studied in this course.

A Recap - Determine the overall trend with Indicators on a longer-term chart.  Zoom in to a short-term chart, say a 15 minute chart to determine your entry point, which should match all of your systems entry conditions. The Trading Flow Chart may help here.

Counter-Trend Trading

Once you determine the overall long-term trend, counter-trend traders look for a reversal.  The reversal will be seen as momentum reaches an exhaustion point.  We've also talked extensively about the reversal, especially in chart patterns and candlestick chart patterns where changing sentiment can be seen pictorially. This type of trading is more risky than trend trading, but the rewards are generally greater.

Break-Out Trading and The Straddle Trade

Break-out trading is following a market in a range or channel then either:
  • Determining the direction of the break (directional bias)
  • Or placing trades on either side, hoping to catch a breakout in either direction (non-directional bias, or straddle trade). 
This is particularly effective when a pair has been a tight range because it is usually an indication that the pair is about to make a big move. Your goal here is to set yourself up to catch the wave!  

We looked at a good example of the break-out trade when talking about Trading The News Strategies - Directional and Non Directional Bias (The Straddle Trade). Here, we determined a range where support and resistance had been holding strongly, prior to an important news release. We then set entry points above and below our breakout levels. As a rule of thumb we want to target the same amount of pips that makes up our determined range.

We also looked at how to trade the break-out and how to identify it in our lesson - Average True Range (ATR) - A Volatility Indicator.  This useful tool can help identify the signs of a good break-out and it's strength.

More...


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Introduction

As part of your Trading Plan you must determine what kind of trader you are going to be.  Are you going to be a Scalper a Swinger, or are you going to mix Position Trading with a wee bit of Day Trading?  You need to pick one, or a combination, that's going to suit your personality and psychological make-up.  Are you aggressive or relaxed?  Do you feel uneasy while in losing positions, or don't you mind holding small losing positions if long-term averages are going to go your way?  All these things need to be considered.

A typical scenario is that a new trader reads a little bit about trading forex, finds a system online that claims to make money quickly, and then jumps right into trading because he feels like he's got enough of a background to make millions of dollars.  Unfortunately after the "honeymoon" period is over and the excitement settles down, this new trader now realizes that trading isn't as easy as he thought. The system doesn't seem to be working like it claimed it would and he has no idea why the market is doing what it's doing.  The most important thing you can invest in as a trader is your TIME! Every single trading day is a learning experience and if you stop learning, then you will never become a truly successful trader.

Scalping

This is a high paced type of trading where positions are held for a matter of seconds or minutes.  Scalpers aim to grab small amounts of pips many times during the day and requires intense focus and quick thinking to be successful.  It's best suited to those traders who can spend hours per day pouring over charts with their finger on the button.

Reasons to Scalp:
  • You like intense quick excitement
  • You can sit at your desk several hours at a time
  • You are impatient
  • You can change direction quickly
  • You think on your feet
Reasons not to Scalp:
  • You stress easily when faced with fast moving decisions
  • You have time constraints
  • You like to analyse the market prior to entering
Scalping is best suited under the following conditions:
  • Trade the most liquid markets with the tightest spreads.  Spreads are a cost, so EUR/USD, GBP/USD, USD/CHF and USD/JPY will be the most cost effective pairs to trade.
  • Trade the most liquid times of day.  The busiest times of the day are the most liquid.  The below table highlights the busiest times:
 New York ESTLondon, Dublin GMTFrankfurt, Paris CETBeijing, Hong KongMel, Sydney
02:00 to 04:00am07:00 to 09:00am        08:00 to 10:00am15:00 to 17:0018:00 to 20:00
08:00 to 12 noon13:00 to 17:0014:00 to 18:0021:00 to 01:00am00:00 to 04:00am
  • Trade few pairs first to get used to the pace
  • Don't forget money management
  • Know your News releases - They can move the market significantly
Day Trading

Day Trading is another short term trading style.  It lasts longer than Scalping - you're usually in and out of one or two trades a day.  Day traders don't like to hold overnight positions, which may go against them.  Some markets aren't 24 hours, so you'll find it impossible to close a trade in some stocks and futures out with market hours. Volatility is key here.  They prefer to do their homework on a couple of markets, execute at the start of their trading day and at the end of it.  

Reasons to Day Trade:
  • You like the certainty of knowing your winning/losing positions on a daily basis.
  • You prefer to analyse markets in great depth first
  • You like to keep abreast of economic news and releases, so you can anticipate the market move
  • You have time on your hands and you'd like to trade full-time
Reasons not to Day Trade:
  • If you think this is a get rich quick activity - DON'T TRADE.
  • You don't like to hold positions all day
  • You don't have time for market analysis
  • You have a job and can't devote the time needed to Day Trade.  Having a Full-time job and day trading isn't a good combo.  You'll find it hard to focus your energy during market opening hours.  A Part-time job and day trading may be a better combination.
  • There are larger transaction costs involved in day trading since you are executing trades on a daily basis.
Day Trading Styles

There are three main types of Day Trading
Trading the Trend

We've talked about this at great length throughout this course.  It's the basis of most strategies and probably the most popular way to trade.  It requires Time Frame Analysis to determine the larger trend, analysing support and resistance levels and utilising all the technical indicators and charting tools that we've studied in this course.

A Recap - Determine the overall trend with Indicators on a longer-term chart.  Zoom in to a short-term chart, say a 15 minute chart to determine your entry point, which should match all of your systems entry conditions. The Trading Flow Chart may help here.

Counter-Trend Trading

Once you determine the overall long-term trend, counter-trend traders look for a reversal.  The reversal will be seen as momentum reaches an exhaustion point.  We've also talked extensively about the reversal, especially in chart patterns and candlestick chart patterns where changing sentiment can be seen pictorially. This type of trading is more risky than trend trading, but the rewards are generally greater.

Break-Out Trading and The Straddle Trade

Break-out trading is following a market in a range or channel then either:
  • Determining the direction of the break (directional bias)
  • Or placing trades on either side, hoping to catch a breakout in either direction (non-directional bias, or straddle trade). 
This is particularly effective when a pair has been a tight range because it is usually an indication that the pair is about to make a big move. Your goal here is to set yourself up to catch the wave!  

We looked at a good example of the break-out trade when talking about Trading The News Strategies - Directional and Non Directional Bias (The Straddle Trade). Here, we determined a range where support and resistance had been holding strongly, prior to an important news release. We then set entry points above and below our breakout levels. As a rule of thumb we want to target the same amount of pips that makes up our determined range.

We also looked at how to trade the break-out and how to identify it in our lesson - Average True Range (ATR) - A Volatility Indicator.  This useful tool can help identify the signs of a good break-out and it's strength.

More...


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