The goal of every trader is the same — to profit — but what sets them apart is the manner in which they approach this. Some traders prefer to make small, frequent profits, while others prefer a long-term approach. Thankfully, there are different trading strategies, so you can find the approach that best suits your trading style.
What Are the Different Types of Traders?
Four Types of Traders
We can categorize traders based on different criteria. The most common is a classification based on trading philosophy, where we have technical and fundamental analysts. Technical analysts use charts and price action to predict the future price movement of assets, while fundamental traders assess an asset’s fair value and determine if it is currently overpriced or underpriced.
A more straightforward classification of traders is based on their trading frequency and how they enter and exit trades. There are four main types: scalpers, day traders, swing traders, and position traders. Scalpers usually hold trades for seconds or even less, while day traders hang on more to trades than scalpers but usually don’t like holding them overnight. Swing traders are willing to hold trades for several days, and position traders hold trades for weeks, months, or even years. Some prefer calling them buy-and-hold investors rather than traders for this reason.
Example
Someone forex trading in Singapore might decide to sell (short) the USD/SGD while buying the EUR/USD. However, the timing and frequency of these trades can vary depending on the trader’s style.
If a trader repeatedly buys and sells the EUR/USD in quick succession to capture small price movements, they are acting as a scalper. Day traders, on the other hand, focus on completing all trades within a single trading day. For instance, they might open and close a USD/SGD position within hours, reacting to intraday price changes.
Swing traders profit from medium-term trends and hold their USD/SGD trades for several days or weeks, anticipating larger price swings during that time. Lastly, position traders take a long-term approach, holding a USD/SGD trade for weeks, months, or even years, waiting for significant price changes driven by broader market trends.
Scalpers
Scalpers are traders who open trades for very short durations, often for only a few minutes or seconds. They count on instant executions of their trades to exploit rapid small price movements. For example, a scalper trading USD/SGD creates a buy order and, after 5 seconds, notices a 5-pip fluctuation caused by a sudden spike in demand for the Singapore dollar. They would close the position and lock in their gain, thereby profiting from the small price movement. Profits from these frequent low-risk trades then accumulate over time.
It’s important to note that scalpers use large position sizes and leverage to turn these small movements into meaningful returns.
They have to be focused on their charts, so it is more suited for traders who can sit for many hours without distractions. Scalp traders are also specialists in market liquidity and often focus on the 1-minute or 15-second charts for analysis.
Not all brokers support scalpers because high-frequency trading can overload their systems and reduce liquidity for other clients.
Intraday (Day) Trading
Intraday traders usually wrap up all their trades before the end of a trading day to minimize risks associated with overnight volatility. Depending on their timezone, they typically stick to the trading hours of 9 a.m. to 5 p.m. and are more familiar with the trading sessions during this period.
They often analyze the monthly, weekly, and daily timeframes to determine market direction while relying on lower timeframes like the 8-hour, 4-hour, and 30-minute charts to identify entry points. Common intraday strategies include breakout trading, short-term swings, and support/resistance setups.
However, the term generally refers to trades that are not scalping but closed within the same trading day. These traders also use leverage to improve returns.
Swing Trading
Swing traders capitalize on price swings between market extremes and often hold positions for several days or weeks. This style is especially popular among traders focusing on support and resistance levels. The main objective of swing trading is to capture short-term price movements as the market transitions from one key point to another. Swing traders aim to identify trends early, ride them as they develop, and exit before the reversal point.
Successful swing trading requires careful market analysis to spot trends while avoiding pitfalls like false breakouts or unexpected reversals. Commonly used timeframes for swing trading include the weekly, daily, and 4-hour charts. Traders may also focus on specific trading sessions where increased market volatility offers better opportunities for swift price movements.
Position Traders
Position traders are considered investors because they sit back and let their trades run for months or years. They typically expect a currency to head in a certain direction (either bullish or bearish) before opening a trade. Fundamental analysis is the major type of analysis required here. It involves studying economic reports, interest rates, political stability, and other factors that can affect a currency’s long-term value.
For example, with the newly elected Donald Trump, position traders might expect a stronger or weaker dollar by anticipating the policies he would implement. If traders believe his economic policies, such as the expected tariff hikes, will boost the economy, they may predict a stronger dollar. On the other hand, if they expect his policies to lead to higher debt or trade tensions, they might anticipate a weaker dollar. Position traders use this kind of analysis to make long-term decisions based on their expectations of future economic conditions.
Historical charts are useful for position traders because they show past price movements and help them identify key levels where the price might change direction. These charts allow traders to set realistic exit points—places where they can sell or take profits based on patterns or support/resistance levels. Additionally, position traders often place stop losses more loosely. This gives their trades room to breathe and helps them stay in the trade for the long term without being prematurely stopped.
How To Identify What Strategy Suits You Best
Every strategy has the potential to be profitable. Traders should stick to the one that aligns with their free time and risk tolerance. Some prefer the quick profits of scalping, while others want the long-term vision of position trading. Understanding your strengths and weaknesses is important for a more personalized and effective approach.