Finding the right trading style for your personality and for your daily lifestyle is an important factor when it comes to succeeding in the trading world. Most traders don’t make this connection and just randomly choose a trading approach without cross-checking whether or not they should be trading in such a way.
Day trading is characterized by having multiple trades per day and spending many hours in front of the charts. Day traders usually analyze different instruments and markets, or trade on the lower time-frames to generate more trading opportunities.
Often, day traders enter and exit their trades within hours and often don’t hold positions over night.
Cons: Day traders need a stable personality and have to be able to cope with some of the most common challenges traders face (over and revenge trading) very well. Traders who have a ‘gambling mentality and tend to go on tilt easy, have usually hard times as day traders.
Pros: On the other hand, day traders usually get many signals per day and can, therefore, trade more frequently. If you have a hard time waiting for trading signals on the higher time-frames, day trading might be an alternative. Furthermore, missing a trade as a day trader is not as meaningful, because you will get new entry signals more frequent.
Swing traders have fewer trades. They usually trade the higher-time frames, such as the Weekly, Daily or 4 hours time-frame. Swing traders, as the name implies, are trying to catch greater market swings in order to be able to ride trends longer. Swing traders hold trades for days and, in some cases, also for weeks.
Cons: As a swing trader, you need a lot of patience because signals could take days and weeks to manifest. Additionally, once you are in a trade, you have to have great trust in your system and your analysis because you have to deal with frequent retracement often.
Pro: The daily routine of a swing trader is less hectic. They have more time to do market research and plan their trades in advance. Swing trading might also be a better fit if you are still working in a different job.
Scalpers are the extremes among day traders. Scalpers can easily have dozens of trades per trading session. They hold trades for a few seconds or minutes.
Cons: The cons of day trading apply here as well, but are even more emphasized. Scalping requires a strong character and scalpers need to be emotionally very stable. If you tend to over trade, get frustrated easily or can’t deal with losses, scalping is probably not for you.
Pros: If you are a scalper, the time needed for trading per day can be very limited. Also, individual losses, if taken correctly, don’t have great impact because a scalper gets to many trades per day, that any individual trade has no importance.
Algo / Automated trading
An automated trading strategy trades for you while you don’t have to monitor your trades. After programming your automated trading strategy, you only have to monitor its performance without actively managing markets or trades.
Cons: Creating an automated trading strategy requires programming skills (although there are some software packages that help you with it) and curve fitting is also a very issue. Most automated trading strategies have great past-performance, while failing to deliver the same results going forward.
Pros: Automating a trading strategy removes emotions and the negative impacts that making impulsive trading decisions have. Furthermore, it also frees up time for you because you are not bound to a screen all day long.
Discretionary vs. Rule-based
For every different trading style, a trader has to choose between being a discretionary trader or following a rule based approach. We will explain the differences, advantages and limitations of each approach in the following:
Traders who follow a rule-based approach have usually a fixed set of rules that signal them when they have to enter a trade. Especially traders who rely on indicators are often rule-based, indicator strategies usually require certain values, developments or standings on their indicators before an entry signal exists.
Automated trading strategies are always purely rule-based since conventional algorithms cannot think for themselves and, therefore, need exact parameters that signal them when they have to enter a trade.
Cons: Purely rule-based strategies often have a hard time adapting to changing market conditions and while such strategies perform well under certain conditions, they fail completely when market conditions change.
Pros: As stated under automated trading strategies, rules can eliminate the impacts emotions and psychology often have. If you have fixed parameters for entering trades, your trading style is less subjective and easy to replicate.
The discretionary trading system adapts to changing market conditions. Such methods require a high level of personal analysis and depend heavily on continuous research. Entry signals and how trades execute their trades changes continuously since markets always change.
Cons: Discretionary traders often use their approach as an excuse to be less strict about the way they approach trading. The absence of strict rules does not mean that a trader is purely trading based on assumptions or gut feeling, but that he has to assess current market conditions and adapt to his style.
Pros: Discretionary strategies can adapt to changing market conditions and traders can react faster when markets suddenly change.