What Is The Best Style Of Forex Trading?

Posted On 27 Jan 2015

If you didn’t catch my last article, which was published two weeks ago, I would highly recommend checking it out before continuing with this piece. It covered the huge question of how much we can make when trading the global currency markets. We looked at some of the key learning and understanding required to get a better idea of what your own trading potential could look like with dedication and, of course, a solid rule-based trading plan. This week, however, we will move swiftly on to a look at the different trading styles that we can incorporate into our plan so as to build a quality strategy to achieve those desired profit targets.

As I have said on multiple occasions, for me the FX markets lend themselves perfectly to traders of all experience levels, mainly due to the flexibility you can enjoy in position sizing, the multiple opportunities available across these 24 hour markets, and, of course, the ease of which we can open an account and get involved with a smaller amount of capital. It goes without saying though, that one still needs to have an adequate degree of education before beginning any kind of trading with any amount of capital, no matter how large or small it may be.

I just feel that the FX markets are much simpler in nature when compared to say, the Futures markets, as there are less specifications and working procedures to have to worry about. Plus, the margin requirements are far less demanding than that of the US Equity markets where it can be a huge challenge to be able to make a decent amount of money with a more modest amount of starting capital. In short, the leverage in Forex is very attractive and so makes it a perfect and practical starting point for all.

With that now said, let us talk about the different styles we can use to trade these currency markets. This, in my opinion, is where FX rules the roost over every other asset class (Stocks, Futures and Options) because, unlike the others, Forex lends itself well to all three styles of trading available: Intraday, Swing and Position Trading. Here at Online Trading Academy, we also like to refer to Position Trading as “ProActive Investing” (just so you now know if you happen to hear a reference to that term elsewhere in our educational material). So, now let us take a deeper dive into each of the three styles for a better understanding of them, along with their distinctive pros and cons associated to them.

Style 1 – Position Trading a.k.a. “ProActive Investing”

This style of trading is what many people would deem to be similar to the traditional form of longer-term investing. The name “position” is taken from the act of taking a position in the market. Some also know this style as “Buy and Hold,” meaning that once the position is opened in the market it is then held for a long period of time, through both the ups and the downs, giving the position time to work out for a profit in the long run. In many ways this is flawed as there is no real exit strategy or way to effectively manage the risk, so instead, here at OTA, we teach people to still hold for a while but also employ the use of a stop-loss and profit target just as you would on any other trade. This, in essence, is the proactive method of using this style.

Trades of this nature would more likely be found on monthly, weekly and daily charts. The example below using our Patented Core Strategy is an example of a position trade:

The downside to this type of trade is mainly in the fact that position trades do not present themselves very often and much time is spent waiting for them to trigger. Capital is also tied up for a considerable length of time, yet due to the leveraged nature of FX this is a more reasonable amount than with other asset classes. The final issue, I would say, is that these trades do require a larger risk in pips; but the reward is that much higher in comparison. For a truly hands-off style of trading with little activity and potentially huge pay-outs from time to time, position trading offers plenty of advantages to the very patient trader. This is the ideal means to manage your long-term wealth.

Style 2 – Swing Trading

I would class Swing trading as more of a style used for short-term income, yet with a nice hands-off and low maintenance approach. Ideal for those still in full-time employment or maybe just short on time, swing is also a “Set and Forget” approach to the currency markets. Depending on the number of pairs traded and the charts used, we could expect maybe 3 to 6 decent set-ups a week. Charts from 4 hour and higher work well with this style and there is the huge benefit that the analysis and planning can be done at the time that suits the trader.

Personally, I like to put aside 15-20 minutes a day to do my analysis and set up my orders, giving me plenty of time to do other things with my time. Again, this style offers low maintenance for traders and has the added bonus of controlling emotions due to its set and forget dynamic. The less time the trader spends looking at the screen, the more the trade is left to follow its plan. Here is an example of a swing set-up:

What are the drawbacks then? Well, none that really stand out to hinder progress. This style keeps us close enough to the daily action of the FX markets, but also far enough away so that we don’t interfere with the trades either. Yes, you will have to be patient and some weeks will be light on trading, but as your account grows so will your profits. I think this is the very best style for newer and more experienced traders alike and it is still a huge part of my trade plan.

Style 3 – Intraday Trading

By far this is seen as the most exciting and adrenaline fuelled way to trade, but that does not necessarily equate to being a good thing. I won’t deny that a proficient Intraday trader can make exceptional profits, mainly due to the sheer amount of opportunity which is presented on a daily basis, especially with the wild moves we have seen of late. However, this can also come at a price and for those lacking in patience, discipline and a plan. Day trading can end a career sooner than most would realize. You have to account for spread on each entry and that on the faster timeframes you are likely to see more noise and false signals, especially considering the huge part that algorithms play in the modern trading scene. It is not all doom and gloom though, because if you can give time its course then there is no reason why you could not make it as an intraday speculator with enough dedication. Let’s take a look at an example:

Did you notice how many trades there were on this chart? Sure, you will not win them all; but when it comes together you can see how lucrative it can be, even with some losses in the mix. Patience and discipline, as I said before, are the name of the game here. On the other hand, if you attempt to trade the more volatile pairs like GBPNZD in this style, you are inviting yourself to be chopped to pieces. When you are finding levels on 5 min charts as well, it can be very easy to over trade if you are not careful. Be warned my friends. Yes, it would be nice to make 30 pips a day consistently on average; but it may be easier to go for a bigger move and capture more on a swing trade. The choice is really up to you.

As I have shown you here, the neat thing about all three trading styles is that our Supply and Demand levels that are created by institutional order flow can be seen across many timeframes, thus the strategy works for any style. The key is deciding which is right for you and your lifestyle. Think about your personality and emotions too as they are a huge part of the success story in the end. I would always encourage anyone to start with swing trading to learn to detach from the trades and, only after getting consistent results in that style, to then move on to the others. I hope this was of help to you.