Updated: Dec 6, 2020
There are various ways to categorize forex market participants. In this article, we will discuss the types of forex traders based on the time spent in the market.
1. Scalpers. Scalpers are forex traders who get in and out of the trades in a matter of seconds or minutes. These types of traders aim to lock in small profits repeatedly. Oftentimes, they would use larger position size which magnifies their profit with just a few pips movement. However, they would usually keep their risk (particularly their stop loss) small. It is not uncommon for forex scalpers to place a large number of trades within the day.
For an instance, if you plan to trade 10,000 units (mini lot) of EUR/USD a 10-pip movement is equivalent to $10 dollars; while trading 100,000 units (standard lot), 10 pips means $100.
Emotions play a big factor in trading. For most beginners, they usually have a hard time stopping themselves from trading, because it excites them to be in a trade-- even if their strategy rules aren't apparent at that moment.
Many beginner forex traders are tempted to do scalping. But it is very important to remember that scalping requires an expert skill, especially with price action. This can also be psychologically tiring because one needs to make fast decisions while in a trade. A scalper needs to act immediately to take his profit or cut his loss without much overthinking. A scalper capitalizes on the smaller price movements within the trading day.
It is a common knowledge that beginners should not take big risks when learning scalping. It takes time to master it.
2. Day traders. Like scalpers, day traders need to have an excellent understanding of technical analysis and price action. They usually execute several trades (buy and sell) within the day and close all positions before the next trading day. Stop losses are placed to protect the capital in case the market does not move as speculated.
Most day traders use technical indicators and specific price patterns to pull the trigger. They deeply understand that deviating from their rules is a faster way to a negative profit.
3. Swing traders. Swing traders open and hold forex positions for several days up to several weeks. Becoming a swing trader means you must have adequate knowledge on technical analysis, price action, and fundamental analysis. Swing traders prefer to look for intermediate-term opportunities to capture and profit from a chunk of speculated price movement.
The main challenge among swing traders is that they are susceptible to a loss when a big gap up or gap down occur against an open position. Major economic data or news could influence gaps.
The following is an example of gap up with XAUUSD (gold) over the weekend.
4. Position traders. Position forex traders are those who hold long or short positions for weeks to months (or to a year the most). They are not active traders, placing only a few trades in a year. Short-term fluctuations in market price also do not concern position traders because they are after the bulk of the price movement.
One of the main advantages of position trading is that the trader isn't glued in front of his computer most of the time. However, since nobody can really predict where the market price would go, minor fluctuations could also signal major trend reversal; and position traders might be tempted to ignore them. This could eventually result to a bigger loss.
Forex trading isn't for the faint of heart. Careful planning and adequate understanding of how the market works are just some of the initial steps to become a successful trader.
You must accept the fact that it would definitely require years after years of experience to determine what kind of trading best suites your goals and personality.
Furthermore, the most important thing to consider is that you should never trade with money that you cannot afford to lose. Forex trading is undeniably an emotionally challenging pursuit. I have personally talked with some people who have suffered emotional consequences because they could not accept the fact that they'd lost their money. Learn proper risk management and abide by it at all times. It'll save you far more than you could comprehend at this moment.
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