Through my years of trading, one thing I have found is that one strategy does not fit all. We all have different risk tolerances and monetary goals. One of my goals in each E-mini Futures class I teach is to show the students a strategy and have them take it home and use it as a foundational starting point for defining their own strategy. My style is to follow the trend and enter on pullbacks. You could call this style Intraday Swing trading. This works for me because it fits my personality, patience and discipline. I understand that trading is a business dealing in probabilities and that it takes a series of trades to make a trader, not just one or two trades. However, with that said, not everybody trades like me. Of course, that is a good thing because if we all traded alike then who would take the other side of our trades? So let's discuss some of the different trading styles and see which one fits you.
Basically, there are four styles of trading:
I will breakdown each of the categories to help you better understand which one fits best. Defining your style is very important to your success as a trader. Much like a trader without a written trading plan, you will be bouncing around from one style to the other if you do not pick one and focus on becoming the best you can. Some people who trade stocks start out as traders then become investors when their position goes against them, claiming they don't want to take a loss and will wait until the market comes back for them. I can assure you that in Futures, there is just too much leverage to play that game.
Scalping
Scalping is like drag racing in the racing world. Very fast, short duration, stimulating and usually done by professionals. Their trades can be within seconds of each other and can easily be long (buy) one minute and short (sell) the next. Trading this style requires that you can make decisions instantly and act without any hesitation. People who are looking for instant gratification are usually better-suited for this style. Usually these people will exit the trade immediately if it goes against them. To excel in this style, you must be very fast with your thinking and dexterous with your mouse. If you find that the mouse pointer is a little intimidating and double-clicking is difficult, then this is not your style of trading. Also, you must not become distracted while Scalping. If you find yourself staring out the window or watching TV while trading, this could cause serious problems to your trading account. For example, if your mind wandered off while reading this paragraph, then Scalping is certainly not for you.
Day Trading
Day trading is for the trader who wants to enter and exit the trade during the same trading day. They find that they can sleep better at night not having a position on and worrying about an adverse move overnight such as a large gap opening. Another advantage is the margin required to day trade is extremely low, thereby offering more leverage and a much higher return on their investment. For example, the Nymex Gold contract currently requires about $5,400 Initial margin per contract to hold a position overnight. Currently, you can day trade Gold for as little as $500. With the price of Gold around $950, the contract value you are trading is $95,000! The downside to this is many new traders over-leverage themselves with this inexpensive margin. Day traders usually try to obtain risk/reward levels of at least 1:3 by holding positions longer than Scalpers. Direct Access trading has made day trading much easier to compete in the markets, there is a more level playing field, faster price fills and reports and the opportunity to trade from just about anywhere in the world. Most day traders only use technical analysis to trade. Fundamental news is usually too slow to day trade from. Traders will usually watch multiple timeframes during the day to keep an eye on the big picture while trading. You will also find most traders arrive at their trading decision from a larger timeframe but execute the trade on a smaller timeframe of say a 2 to 5 minute chart. These smaller timeframe charts have smaller swings, thereby reducing the dollar-size risk for setting stops at technical levels. Most day traders have a personality trait of wanting to start a project and finish it that same day. They also do not mind sitting at the screen and trading for several hours per day.
Swing Trading
Swing trading requires patience to sit and wait, and wait, and wait some more for a setup to occur. Unlike a Position trader, the Swing trader will be looking for the position to become profitable rather quickly. These traders still understand though that they must allow time, in this case possibly days, to do its work. Most all Swing traders hold their positions overnight, so if walking away from the computer while a position is on bothers you, then maybe Swing trading is not your style. Swing traders typically get their signals from daily bar charts and generally only glance at intraday charts to help time their entries. By using daily bar charts, your stops are going to be larger than day trading due to the larger swings. The upside to this is that the profits "have the potential" to be much larger on a per trade basis than day trading. Most Swing traders are usually well capitalized, also. This allows them to diversify among several different markets at once and also, to withstand the inevitable drawdown periods. Swing traders may combine Fundamental and Technical analysis to make their trading decisions. This style of trading also frees up the trader from sitting at the screen for long periods of time. I have seen many good trades go bad because the trader was sitting and watching the screen. If they had just placed the trade and set their stops and profit objective, the trade would have worked well for them. However, as we sit and watch each price change on the screen, the danger of emotional trading can take over. So if you can place a trade and walk away from the screen without being nervous or anxious, I would strongly recommend this style of trading.
Position Trading
Position trading is the longest duration style of trading. This is usually done by Commercial traders in the Futures markets. The trades can last for months up to several years. Having very deep pockets (very well capitalized) is one of the requirements for this style. Many of the Commercials must use lines of credit with banks to sustain these positions. Position trading requires extreme patience and someone who does not excite easily. While holding these positions you could be buying while everybody else is selling. This is referred to as "scaling" into a position as opposed to "all in". While accumulating these positions the trader may also be hedging themselves until the move does start to go their way. One clue as to if you can Position trade is to look at your reactions when you have, say, $1,000 in profit. Are you ready to lock this profit in? Do you want to snug your stop up real close to the current market action so you don't give back much profit? Are you starting to see market signals against your position? If you feel any of these you probably would be a better Swing trader than Position trader. A consistently profitable Position trader will be looking for much, much larger profits before even considering exiting their position. Remember, too, these traders usually have large contract-size positions. So they have to scale out of their positions in order not to "spook" the market with their big orders. These traders will definitely be using Fundamental as well as Technical analysis to manage their trades. For trade signals they may take them from weekly or even monthly charts. So you can see how big the price swings are that these traders are using to conduct their business.
Once the trader has determined what style of trader they are, the next step is to determine if you are a Discretionary or a System trader. Discretionary trading is based on decision making while managing or deciding which trade to take, while System trading is based on rules and does not deviate from these rules. Both of these styles can be profitable if used by a trader whose psychology fits. In class, I like to get students to think for themselves when it comes to trading. So I try and get them to think like a Discretionary trader. However, since we are all different, I do not force a style on anybody. Much like when you meet somebody and you try and change their personality to be like you. We all know that if they do change, it is only temporary and before long, they are back to being themselves. It is no different in teaching a student to trade. We all just need to find out which way is conducive to our psychological makeup and use that style. Let's look at these two styles a little deeper.
Discretionary Trading
Discretionary trading allows the trader to make decisions about their trade based on all the information they have at the time of the decision. For example, if the market has had a strong rally and the trader gets a buy signal, he may elect not to take it feeling the market is overbought. Consistently profitable Discretionary traders still have a trading plan to follow. This can also be a system that tells them when to get into a trade, but allows them to manage the trade for exits at their own discretion. These traders usually like being in control of situations. They are not comfortable letting a machine or anybody else make their decisions for them.
System Trading
System trading is based upon strict rules that cannot be overridden by the trader. Meaning that if the system issues a buy signal, the trader "must" take the trade. There is no room for human input or thinking. Another name for this style of trading is "Black Box Trading." Many hedge funds and large traders use these Black Box systems to extract money from the markets on a daily basis. Today, we can actually design our own system and have trading software such as Trade Station execute the trade, place our protective stop and profit target all without any input from the trader. Most system traders are very analytical and come from mathematic or computer programming backgrounds. System traders have no problem letting the computer make all their decisions for them. They don't have to feel like they are in control of the trade. Being a system trader also means you truly believe that trading is a probability business.
By identifying our style of trading we are comfortable with, we have a much better chance of sticking to our plan during the bad times of trading. Not committing to a style will make us prone to switching from one to the other every time our strategy has a few losses. By doing this, we are assuring we will catch most of the losing streaks and forfeit the profitable trends where we stand to make good profits. So if you find yourself switching from strategy to strategy, ask yourself if you have identified the style of trader you are. This will go a long way in helping you become a profitable trader.
As the lyric in the song goes, "We must stand for something or we will fall for anything."
Until next time,
Basically, there are four styles of trading:
I know you are thinking that Scalping is day trading. In some ways it is but with different analysis and timeframes. Scalpers will usually hold trades for seconds to a couple of minutes while a day trader may hold a position from a couple of minutes to several hours. Swing traders usually hold their positions for a few days at a time. While position traders will hold them from several weeks to years. In order for you to choose which type of trader you are, you will have to choose a timeframe you are comfortable with.Scalping
Day Trading
Swing Trading
Position Trading
I will breakdown each of the categories to help you better understand which one fits best. Defining your style is very important to your success as a trader. Much like a trader without a written trading plan, you will be bouncing around from one style to the other if you do not pick one and focus on becoming the best you can. Some people who trade stocks start out as traders then become investors when their position goes against them, claiming they don't want to take a loss and will wait until the market comes back for them. I can assure you that in Futures, there is just too much leverage to play that game.
Scalping
Scalping is like drag racing in the racing world. Very fast, short duration, stimulating and usually done by professionals. Their trades can be within seconds of each other and can easily be long (buy) one minute and short (sell) the next. Trading this style requires that you can make decisions instantly and act without any hesitation. People who are looking for instant gratification are usually better-suited for this style. Usually these people will exit the trade immediately if it goes against them. To excel in this style, you must be very fast with your thinking and dexterous with your mouse. If you find that the mouse pointer is a little intimidating and double-clicking is difficult, then this is not your style of trading. Also, you must not become distracted while Scalping. If you find yourself staring out the window or watching TV while trading, this could cause serious problems to your trading account. For example, if your mind wandered off while reading this paragraph, then Scalping is certainly not for you.
Day Trading
Day trading is for the trader who wants to enter and exit the trade during the same trading day. They find that they can sleep better at night not having a position on and worrying about an adverse move overnight such as a large gap opening. Another advantage is the margin required to day trade is extremely low, thereby offering more leverage and a much higher return on their investment. For example, the Nymex Gold contract currently requires about $5,400 Initial margin per contract to hold a position overnight. Currently, you can day trade Gold for as little as $500. With the price of Gold around $950, the contract value you are trading is $95,000! The downside to this is many new traders over-leverage themselves with this inexpensive margin. Day traders usually try to obtain risk/reward levels of at least 1:3 by holding positions longer than Scalpers. Direct Access trading has made day trading much easier to compete in the markets, there is a more level playing field, faster price fills and reports and the opportunity to trade from just about anywhere in the world. Most day traders only use technical analysis to trade. Fundamental news is usually too slow to day trade from. Traders will usually watch multiple timeframes during the day to keep an eye on the big picture while trading. You will also find most traders arrive at their trading decision from a larger timeframe but execute the trade on a smaller timeframe of say a 2 to 5 minute chart. These smaller timeframe charts have smaller swings, thereby reducing the dollar-size risk for setting stops at technical levels. Most day traders have a personality trait of wanting to start a project and finish it that same day. They also do not mind sitting at the screen and trading for several hours per day.
Swing Trading
Swing trading requires patience to sit and wait, and wait, and wait some more for a setup to occur. Unlike a Position trader, the Swing trader will be looking for the position to become profitable rather quickly. These traders still understand though that they must allow time, in this case possibly days, to do its work. Most all Swing traders hold their positions overnight, so if walking away from the computer while a position is on bothers you, then maybe Swing trading is not your style. Swing traders typically get their signals from daily bar charts and generally only glance at intraday charts to help time their entries. By using daily bar charts, your stops are going to be larger than day trading due to the larger swings. The upside to this is that the profits "have the potential" to be much larger on a per trade basis than day trading. Most Swing traders are usually well capitalized, also. This allows them to diversify among several different markets at once and also, to withstand the inevitable drawdown periods. Swing traders may combine Fundamental and Technical analysis to make their trading decisions. This style of trading also frees up the trader from sitting at the screen for long periods of time. I have seen many good trades go bad because the trader was sitting and watching the screen. If they had just placed the trade and set their stops and profit objective, the trade would have worked well for them. However, as we sit and watch each price change on the screen, the danger of emotional trading can take over. So if you can place a trade and walk away from the screen without being nervous or anxious, I would strongly recommend this style of trading.
Position Trading
Position trading is the longest duration style of trading. This is usually done by Commercial traders in the Futures markets. The trades can last for months up to several years. Having very deep pockets (very well capitalized) is one of the requirements for this style. Many of the Commercials must use lines of credit with banks to sustain these positions. Position trading requires extreme patience and someone who does not excite easily. While holding these positions you could be buying while everybody else is selling. This is referred to as "scaling" into a position as opposed to "all in". While accumulating these positions the trader may also be hedging themselves until the move does start to go their way. One clue as to if you can Position trade is to look at your reactions when you have, say, $1,000 in profit. Are you ready to lock this profit in? Do you want to snug your stop up real close to the current market action so you don't give back much profit? Are you starting to see market signals against your position? If you feel any of these you probably would be a better Swing trader than Position trader. A consistently profitable Position trader will be looking for much, much larger profits before even considering exiting their position. Remember, too, these traders usually have large contract-size positions. So they have to scale out of their positions in order not to "spook" the market with their big orders. These traders will definitely be using Fundamental as well as Technical analysis to manage their trades. For trade signals they may take them from weekly or even monthly charts. So you can see how big the price swings are that these traders are using to conduct their business.
Once the trader has determined what style of trader they are, the next step is to determine if you are a Discretionary or a System trader. Discretionary trading is based on decision making while managing or deciding which trade to take, while System trading is based on rules and does not deviate from these rules. Both of these styles can be profitable if used by a trader whose psychology fits. In class, I like to get students to think for themselves when it comes to trading. So I try and get them to think like a Discretionary trader. However, since we are all different, I do not force a style on anybody. Much like when you meet somebody and you try and change their personality to be like you. We all know that if they do change, it is only temporary and before long, they are back to being themselves. It is no different in teaching a student to trade. We all just need to find out which way is conducive to our psychological makeup and use that style. Let's look at these two styles a little deeper.
Discretionary Trading
Discretionary trading allows the trader to make decisions about their trade based on all the information they have at the time of the decision. For example, if the market has had a strong rally and the trader gets a buy signal, he may elect not to take it feeling the market is overbought. Consistently profitable Discretionary traders still have a trading plan to follow. This can also be a system that tells them when to get into a trade, but allows them to manage the trade for exits at their own discretion. These traders usually like being in control of situations. They are not comfortable letting a machine or anybody else make their decisions for them.
System Trading
System trading is based upon strict rules that cannot be overridden by the trader. Meaning that if the system issues a buy signal, the trader "must" take the trade. There is no room for human input or thinking. Another name for this style of trading is "Black Box Trading." Many hedge funds and large traders use these Black Box systems to extract money from the markets on a daily basis. Today, we can actually design our own system and have trading software such as Trade Station execute the trade, place our protective stop and profit target all without any input from the trader. Most system traders are very analytical and come from mathematic or computer programming backgrounds. System traders have no problem letting the computer make all their decisions for them. They don't have to feel like they are in control of the trade. Being a system trader also means you truly believe that trading is a probability business.
By identifying our style of trading we are comfortable with, we have a much better chance of sticking to our plan during the bad times of trading. Not committing to a style will make us prone to switching from one to the other every time our strategy has a few losses. By doing this, we are assuring we will catch most of the losing streaks and forfeit the profitable trends where we stand to make good profits. So if you find yourself switching from strategy to strategy, ask yourself if you have identified the style of trader you are. This will go a long way in helping you become a profitable trader.
As the lyric in the song goes, "We must stand for something or we will fall for anything."
Until next time,
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