What Type of Forex Trader You Are?

Last Updated August 23rd 2021
8 Min Read

Among all the financial markets, the forex market provides some of the best opportunities for profit. It is a large and global market where you can trade for 24 hours. It can be profitable for even beginners. However, this does not mean that every forex trader can be successful. Some things make traders more successful. These are your research and analysis ability, instincts, and the timing of the trade. 

Timing is a significant factor while trading in the foreign exchange. Perfect timing helps you execute your ideas and strategies in a good manner.

Based on the time frame, forex traders can be broadly classified into three main categories: day trader, swing trader, and position trader. Read about these categories and decide which type of trader you are and which one you should be.

1. Day Trader

A day trader makes frequent and high-volume trades in an intraday timeframe.  A large number of the traders belong to this type. These traders rarely hold anything in their hands at the end of the day. This means their trade will not be hit by any negative news that comes after closing and before the opening of the market the very next day.

In this, every day you have to aim for quick turnover rates on your multiple trades. Generally, you aim 10-100 times the normal transaction size. With this, you can target high profits. For this, you must aim for short time frames such as 1 minute, 10 minute, or 15 minutes periods. To be a successful day trader, you must adapt to the prompt changes in rates. Also, you need to be an expert in the techniques as these traders rely more on technical trading patterns. As a short-term trader, you must look for quick opportunities.

As a day trader, you must look for volatile currency pairs. For example, one of the most volatile of the currency pair is that of the GBP/JPY. On average, this pair ranges as high as 100 pips (percentage in point or price interest point) in an hour. On the other hand, currency pairs of Euro/USD show only 10-20 pip ranges in an hour. The former currency pair is best for short-term day traders to trade.

As a forex day trader, you can follow two different procedures:

  • Trend trading: You start with a chart that has long time frames, and pick a trend. Following this, you move to a chart with a shorter time frame. Now you trade watching the direction of the trend. This will help you make an entry into the market.
  • Counter-trend trading: In this, you find the big trends that cover a long-time frame. However, you look to the opposite trends for trade.

2. Swing Trader

Unlike a day trader, a swing trader holds his trade for longer days expecting a turn in the market. Like day traders, these traders also rely on technical trading patterns rather than fundamental analysis. However, they must be informed of any news that may trigger volatility in the forex market.

As a swing trader, you need not panic with every single pip in your trades like day traders. So, there is no need to be extremely alert. but when it comes to chart analysis, you must have a strong eye for minute details. As a swing trader, you must most likely trade in more liquid currency pairs such as the GBP/USD.

As a swing trader, you can adopt various strategies such as:

  • Reversal: This is based on the price momentum change.
  • Retracement trading: In this, you spot a temporary reversal of the price.
  • Breakout trading: Here you take a position at the start of an uptrend and then wait for the breakout. If the price breaks out at an important resistance level, you can make your entry in that position.
  • Breakdown trading: In this, you take the position at the start of a downtrend and wait for the price to break down. Once the price breaks down, you make an entry into the market.

Read more: Mistakes That Swing Traders Need To Avoid While Bidding

3. Position Trader

These traders hold their trades for a longer period ranging from several weeks to months to years. Unlike the above-mentioned day traders and swing traders, these long-term traders look at the performance of their traders over more sustained timeframes. Short-term price fluctuations do not affect them as they look for higher profits over the period. 

As a position trader, you need to be quite patient as your money may get blocked for several months. Further, you need to be an expert in advanced analytical skills. You must know fundamental models and opportunities and will have to adhere to them. Before trading, you must analyse various economic models, upcoming expected announcements from the government, and interest rates. With so many considerations, you can trade in any of the major liquid currencies including G7 currencies and other emerging market currencies.

You can use different strategies in position trading such as:

  • Support and resistance trading: In this, you analyse the forex charts to spot the support and resistance zones. These zones involve the trend where prices can reverse or stop.
  • Trend forex trading: In this, you use a moving average as the technical tool to spot the trend.
  • Breakout trading: Like swing trading, this strategy allows you to understand if there is any new trend. When a price moves beyond support/resistance level, it is considered as a breakout.
  • Pull back trading: In this, you look for any reversal or drop in the current trend. If it happens, the trader will leverage the pause or drop in the current trend.

Read Also: How To Become A Forex Trader

Factors To Consider For A Profitable Forex Trading

When it comes to forex trading, picking any one-time frame is not enough. You need to look into several different factors for profitable trading. Here are some basic factors to consider that can affect your trading.

Leverage

Leverage is one of the best tools that a day trader must use to capitalise on the given opportunity. You must always know how much risk you can bear before making any transaction. As a day trader, you can leverage your original investment to as many as 100 times and trade in the market. 

Similarly, a swing trader can also decide upon their leverage. As a trader, you must always do the risk assessment and see how much leverage ratio is suitable for your trading.

News releases

All three types of traders must be informed of any news releases whether scheduled or non-scheduled. You must also understand how they will affect the market. These news releases can be related to central bank press conferences, rate decisions, or any economic announcements. Whatever they are, you need to make some adjustments to your trading plan accordingly.

It’s the day traders and swing traders that are most affected by these sudden news releases. Because of the same reason, most of the people in the market prefer a position trade. As the position trader already anticipates any prices disruption, these incidents affect them the least. They mainly focus on their long-term benchmark targets.

Currency Pair

With the leverage consideration you can anticipate the amount of loss. However, it is equally important to know how fast you can lose your trade. The currency pair choice is different for different traders. For example, it is seen that the British Pound/Japanese yen currency cross can vary up to 100 pips in an hour. For a day trader, it is a challenging thing but can give instant returns. 

However, a swing trader looks for changes in the direction of the market and takes advantage of the same. Thus, as a swing trader, you must focus on liquid pairs like that of the G7. For example, the Euro/USD. 

How To Know Which Time Frame Is The Best?

Most of the traders, new or experienced, want to know which time frame gives the most profitable trade. You can select the time frame based on two factors:

  • How much you can invest in trading per day?
  • What is the most common time frame used to identify the trade setups?

For example, those who can invest only an hour or two must analyse the chart for the entry trigger. On the other hand, people who can dedicate more time in a day must use smaller time frames to act fast whenever any opportunity arises.

Check Out: The Best Forex Trading Hours

Which Forex Time Frame Should You Choose?

You may wonder which time frame is better than the other. However, picking a particular time frame for forex trade largely depends on your trading style and strategies in your mind. You must decide whether you want to make money with volatile currency pairs or want to be patient for long-term profits in position trade.

However, the good part is that you need not stick to one timeframe in forex trading. You can combine two or more for more profitable trading.  This is known as multiple time frame trading. In this, you look at a currency pair for different time frames simultaneously. With this, you can find multiple trading opportunities.

In this, you start by picking the longer-term trend while looking for the ideal entries in the smaller time frame chart. While switching between time frames, you must use a ratio of 1:4 or 1:6. Here the four or six hours are used as a longer timeframe and for a shorter time frame; you can look at one hour chart. With the longer time frame, you can analyse and establish the trend while you can look for ideal entry points with short time frames. 

If you want to perform more granular analysis, you can add medium time frames also. This trading strategy helps you to manage different trading positions at one time. You can use indicators as a tool in this strategy.

Conclusion

Now that you understand the different time frames in forex trading, you can decide what type you must pick. For a good forex trader, you must be disciplined, be an expert in reading forex analysis charts, understand technical tools, and fundamental analysis.

At the same time, stay up-to-date about any forex signals and news to get an idea of any upcoming risks and opportunities in the coming time. Enjoy trading!

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