If you are a new trader, it may be a difficult task for you to choose your trading style, but it is absolutely a necessary step for your long term success as a trader. By choosing the trading style that best suits your personality, you will have a better chance of being a profitable trader. In this section, we shall look at the various trading styles and see whether you can find one style that suits you most.
According to Jack Schwager, author of Market Wizards, successful traders usually match one of the four types of trading with their personality type.
Scalping is a very rapid trading style. Scalpers often make trades within just a few seconds of each other, and often in opposite directions (i.e. they are long one minute, but short the next). Scalping is best suited to active traders that can make immediate decisions and act on those decisions without hesitation. It is one of the most cognitive demanding forms of trading. Successful scalpers rely on intuition developed through years of experience along with a defined set of rules that are part of their overall system. This may be out of reach for traders who are just starting out. In addition, new traders who have more active personalities tend to overtrade their accounts. Even experienced active traders can fall into the overtrading trap as well.
If you are one of those who get worried because of overnight positions then maybe day trading is for you. Like scalping, day trading also have no overnight positions, but it is the milder form of scalping. Day traders may take two or three trades a day and then liquidate all trading positions before the close of the day. A day trader does not subject his or her capital to overnight risk that can adversely affect a portfolio.
While day trading requires skill, knowledge and discipline, it does not require the precision and high winning percentages to become profitable like scalping. They can usually locate trading opportunities that offer a minimum 1 to 2 risk to reward ratio. Overtime, as the active personality skills develop, they may incorporate scalping as a natural next step.
By developing a solid day trading plan, active traders will have both a winning strategy that they can stick with because it matches their personality style which needs activity and variety.
Swing trading strategy would ideally fit the analytical person as he aims to profit from both trend following moves and the subsequent corrections. Active personalities may find swing trading uncomfortable as they incline to make quick decisions, they cannot stick to a swing trading plan that may take weeks to unfold. They may feel restless and even begin to question the trade. As a result, they will find themselves taking profits or exiting a trade too early. Swing trading generally requires a larger stop loss than day trading, so the ability to keep calm when a trade is against you is a necessity.
Position trading is the longest term trading of all, and often has trades that last from weeks to months. Therefore, position trading is only suitable for the most patient and least excitable traders. Position trading targets are often several thousand pips, so if your heart starts beating fast when a trade is 25 pips profit, position trading is probably not suitable for you. Position trading also requires the ability to ignore popular opinion because a single position trade will often hold through both bull and bear markets. For example, a long position trade may need to be held through an entire year when the general public is convinced that the economy is in a recession. If you are easily swayed by other people, then position trading is going to be difficult for you.
Being faithful to your Trading Style
Choosing a trading style requires the flexibility to know when a trading style is not working for you, but also requires the consistency to stick with the right trading style even when it is not performing optimally. One of the biggest mistakes that new traders often make is to change trading styles (trading systems) at the first sign of trouble. Constantly changing your trading style or trading system is a sure way to catch every losing streak. So often we hear that traders have to change their personality to fit trading. To some extent this can be done. However, if the changes are too far from a person’s core personality, failure is more likely. Personality should drive the choice of trading strategy rather not the other way round. Once you are comfortable with a particular trading style, remain faithful to it, and it will reward you for your loyalty in the long run.