The 4 Categories of Trader (Explained)
- Scalpers
- Intraday Traders
- Swing Traders
- Position Traders
Much like in football, some players work best in a specific position such as Right back or Left Winger, others are versatile and can cover a variety of positions (Phil Neville?). This is similar in trading; traders can specify in one type of trading or be accustomed and accomplished in different disciplines.
Before we get into the 4 major disciplines, let’s look at what YOU as a trader must analyze before deciding what type of trader you are going to be. How do we do this? through the good old-fashioned SWOT analysis. Do you have a need for action? Or do you prefer to take your time and have a full in-depth analysis of a market. Are you a technical or fundamental trader? Are you a patient person or impulsive? All these factors will decipher what trader you are. Remember, trading is subjective and individualistic, you must do what is best for your personality, not anyone else’s.
- Scalper
The scalper is the need for speed trader, they like action. Trading on very quick timeframes such as the 1-minute and 5-minute charts, looking for miniscule movements in price. Scalpers needs to be cool headed, quick thinkers who are VERY disciplined. As the scalper will likely have multiple trades on per session, the risk per position is low (0.25%-0.5% is the norm). The scalper must be able to decipher setups with a swift scan of the charts and be able to execute quickly and without thought or worry. Scalping takes a Lot of experience to get right, I would say multiple years of experience is required to be a consistently profitable scalper.
Although the idea of placing a lot of trades on and being in the thick of the action sounds fun, you must decide whether you can handle it. Imagine losing your $100 or $1000 position in a matter of minutes or going on a losing streak where you lose 5 or 6% of your equity in one hour, for some (most?) this may be too difficult to handle psychologically. Scalping primarily relies on technical analysis, therefore if you are fundamental trader, scalping is not advisable. Newbies beware, I would certainly not recommend scalping if you are new to trading, start on the higher timeframes. However, if you do have some experience and scalping suits your personality then give it a shot! TIP – pick currency pairs which have the lowest spread, e.g. EURUSD/USDJPY.
If you do trade the markets’ part time, it always best to pick your hours of scalping, TIP- keep your sessions under 3 hours as it does require your full concentration and can fry your brain after too long! Get yourself into a routine so you become more and more familiar with your market timeframe and the manner it moves.
Pros
- In and out of the market quickly (avoids being worried about a trade overnight)
- Can go on long winning streaks.
- Ability to make a lot of money in a short space of time.
- Only need to be at the charts for a short period of time per day (e.g you may just scalp market opens when volume and volatility is high)
- Satisfies some traders need for action.
- Good for impatient traders.
Cons
- Require LOTS of discipline.
- Can be stressful (Side effects may be hair loss)
- Not for inexperienced traders.
- Can lose a lot of money fast.
- Requires a big learning curve.
- Requires more equipment (more screens, better internet connection)
- High commissions.
- The Intraday Trader
The Intraday trader is a slight move up from those 1 minute and 5-minute charts, primarily placing trades on the 15 min to 1-hour charts. Whereas scalping involves a lot of discipline, intraday trades are required to be more patient as trades usually take a few hours to reach TP (target Price). Intraday traders have a bit more time to analyze and decipher the best setups without having to act on haste due to the quickness of the charts. Intraday trading is suited to those traders who prefer to take their time with their trades.
Part time traders who have access to the markets during their work hours may be suited to this discipline (IF it fits your personality) as intraday trading can require a scan of the markets every few hours to catch up on a trade or check the watchlist to see if any setups have presented themselves. Whilst intraday traders primarily rely on technical analysis, fundamental analysis can be used as added confluence for some traders.
An Intraday traders’ risk may be higher than that of a scalper due to the simple fact they will be placing fewer trades per day, typically around 1 or 2 max with 1-2% position size (this is obviously dependent on the trader)
Pros
- Less need to be stuck at the charts (those with full time jobs)
- Less need to constantly monitor positions.
- Time to analyze the markets without having to place a trade very quickly.
- Better suited to those with full time jobs.
- Can realize great equity gains on a weekly basis.
Cons
- Not for inexperienced Traders.
- Temptation to take trades out with your strategy.
- Possibility of revenge trading after a drawdown.
- Can go on losing streaks.
- The Swing Trader
The swing trader will primarily use the 4 hour and daily charts to trade, normally holding positions from a few days to several weeks. You can start to see a pattern now; the timeframes are starting to move up! Fundamental and Technical analysis can both be prevalent in this style of trading, however, it can work with one or the other. Swing traders will be looking to profit on large moves in instruments.
Swing trading is the most popular form of active trading as larger stops eliminates the volatility spikes, fake outs and confusing countertrend movements that appear on the lower timeframes (cough* manipulation cough*??). It is also quite appealing to those part time traders as there is less need to check the charts intraday.
Swing traders have less time pressure to analyze their setups due to the higher timeframes they trade upon, as it is unlikely the trade will move away from them before their analysis has been complete. As per technical theory, high timeframe candles are said to be more powerful and hold more weight compared to lower timeframes, thus, swing traders can argue that using powerful candles helps them increase their win rate and avoid the “NOISE” of intraday charts. Again, the type of trader you define yourself as will depend on your personality and your strategy, some strategies work best on different timeframes, so test them and find out for yourself!
Pros
- Set and Forget type trading.
- More powerful signals from higher timeframe charts.
- Allows more room for trades to breath.
- Less commissions.
- Usually see a higher win rate.
- Avoid the “noise” on the smaller timeframes.
Cons
- Exposure to weekend gaps
- Losing trades may be harder to stomach due to less positions and the time it takes for TP’s to hit.
- Lots of patience required.
- Fundamentals may change during holding period.
- Larger amounts capital needed.
- Takes longer to grow equity.
- Position Trading
Position traders are our final category of traders. And you guessed it, the timeframes continue up! It is probably better suited to categorize these as investors, seeing themselves as buying shares in a countries economy rather that looking for a quick buck. Due to this, position traders are predominately fundamental analysist that hold large positions for months to years, predominately basing their research on the state of countries’ economies and trends in data, ultimately leading them to an informed decision.
This is not to say technical analysis does not hold value within this type of trading, traders can look at weekly and monthly charts to determine the direction of trend, however I would care to guess that the technicals would not hold as much value as fundamentals to position traders. Position trading is not for everyone, most position traders are wealthy individuals where a few percent appreciation per annum makes a LOT of money.
As a trader you look for a few percent gain per month, for these investors they will have to wait months/ years for their positions to close. Positions are also much less frequent, thus the potential reward of this type of trading differs to the other three.
Pros
- Ability to catch major moves.
- Time away from the screens.
- Practically no commissions and fees.
- High speed connections and fast computers not important.
Cons
- Requires large moves to turn a profit.
- Lots of Patience needed.
- Capital tied up for long periods.
- Longer learning curve.
Final Thought – Sit yourself down and think about what suits your personality best, are you Vin Diesel or a Sloth? Are you patient or impatient? Do you have limited time or time to spare? Are you a RTFX member or are you not? (good, plug done again). The point is, find out what’s best for YOU and back yourself.
Trade Safe