When it comes to the types of trading, or trading strategies, there are a lot of choices you can consider depending on your risk tolerance, time horizon, and amount of capital in your account.
However, there are a few key strategies with distinct characteristics that have emerged in the financial markets over the years and a vast majority of traders subscribe to the principles of at least one of them.
It is especially important for beginners to understand the features of these strategies to deceive which is the most sensible choice for their trading objectives.
Day-Trading
Day trading is a trading strategy in which individuals buy and sell financial instruments, such as stocks, currencies, commodities, or derivatives, within the same trading day. The main goal of day-trading is to profit from short-term price movements in these assets.
In general, day-traders refrain from holding positions overnight, instead closing all positions before the end of the session.
Some common features of a day-trading strategy include:
- Short-term trading - as the name suggests, day-traders open and close positions on a short timeframe. Typically, a day-trader will go through hundreds of positions during any given session
- Leverage and margin - Some day traders use leverage and trade on margin, which allows them to control larger positions with a smaller amount of capital. This amplifies both potential profits and potential losses. This is especially true for forex traders
- Technical analysis - Day traders often rely heavily on technical analysis, using price charts, indicators, and patterns to make trading decisions. They look for patterns and trends that suggest potential price movements
- Volatility - day-traders will pick highly volatile assets to make sure they get the most out of each trade and slowly build up their gains during the say
- Risk management - given the volatility of their trades, day-traders almost always employ stop-losses to limit their potential losses from a position
Swing Trading
Swing trading is another popular trading strategy that aims to capture price "swings" or short- to medium-term trends in financial markets. Unlike day trading, swing traders hold their positions for more than a single trading day but typically for a few days to several weeks.
The main goal of swing trading is to profit from price movements within a trend, whether that trend is bullish or bearish.
Swing traders also use a decent amount of technical analysis and deploy technical indicators, such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Bollinger Bands, exponential moving averages, etc.
These technical indicators serve to smooth out price data and present clearer definitions of trend formations on a chart.
Swing traders trade at lower frequencies than day-traders, but the overall frequency of their trades depends on the interchangeability of market trends and time horizons can vary.
Carry Trading
Carry trading, also known as carry trade, is a trading strategy that involves borrowing funds in a currency with a relatively low interest rate and using those funds to invest in a currency or asset with a higher interest rate. The goal of carry trading is to profit from the interest rate differential between the two currencies or assets.
Carry trade is typically used in forex trading. Here’s how the strategy works:
- The trader borrows money in a currency with a lower interest rate, often referred to as the "funding currency." This borrowing is typically done through the forex market where currencies are traded in pairs
- The borrowed funds are then used to invest in a currency or other asset with a higher interest rate, which is known as the target asset. The target asset may be a government or corporate bond, or another interest-bearing asset
- The trader earns the interest rate difference between the two currencies or assets on a regular basis. If the interest earned on the target currency or asset is greater than the interest paid on the borrowed funds, the trader makes a profit from the carry trade
- In addition to interest rate differentials, carry traders also consider potential changes in exchange rates between the two currencies. A favorable exchange rate movement can further enhance profits, while an unfavorable movement can lead to losses
Scalping
Scalping is a popular short-term trading strategy that involves making multiple trades in quick succession throughout the day to capture small price movements. Scalpers aim to capitalize on very short-term price movements and profit from the bid/ask spread.
Scalping is a high-frequency strategy where traders use technical indicators to identify, open and close positions as soon as they generate a small profit.
Scalpers typically aim for small gains on each trade, but because they execute a large number of trades, these gains can add up over time. Risk per trade is usually kept relatively low to manage potential losses.
The technical indicators often used in scalping include moving averages and oscillators.
Position Trading
Position trading is the strategy most people imagine when they hear the word ‘investing’. A position trader is less likely to use very extensive technical analysis and rely more heavily on fundamental factors, such as financials and macroeconomic trends, among others.
Position traders may hold their trades for months or even years, hoping to gain substantially from long-term price movements.
Position traders may open trades with a substantial amount of capital, as their gains depend on long-term fundamental factors and they typically ignore short-term price fluctuations, or they may trim or increase their positions as market conditions evolve.
Position trade can differ considerably between assets, as different micro and macroeconomic factors can affect stocks, crypto, FX, etc.
