What Type of Forex Trader Are You?

What are some things that separate a good trader from a great one? Guts, instincts, intelligence, and, most importantly, timing. Just as there are many types of traders, there is an equal number of different time frames for traders to develop their ideas and execute their strategies.

At the same time, timing also helps market warriors account for factors outside of their control. They can include position leveraging, nuances of different currency pairs, and the effects of scheduled and unscheduled news releases in the market. Timing is always a major consideration when participating in the foreign exchange world.

Want to bring your trading skills to the next level? Read on to learn more about time frames and how to use them to your advantage.

Key Takeaways

• There are different forex trading strategies for each time horizon.
• Day traders seek to profit from small changes in the intraday market.
• Swing traders seek to hold a position for hours or days, anticipating a turn in the market.
• Position traders have the most long-term outlook, and examine government decisions and interest rates to forecast price changes.
• Forex traders should also pay attention to news and interest rates when assessing the market.

Common Trader Time Frames

In the grander scheme of things, there are plenty of names and designations that traders go by. But when taking time into consideration, traders and strategies tend to fall into three broader and more common categories: day trader, swing trader, and position trader.

1. The Day Trader

Let’s begin with what seems to be the most appealing of the three designations, the day trader. A day trader will, for a lack of a better definition, trade for the day. These are market participants that will usually avoid holding anything after the session close and will trade in a high-volume fashion.

On a typical day, this short-term trader will generally aim for a quick turnover rate on one or more trades, anywhere from 10- to 100-times the normal transaction size. This is in order to capture more profit from a rather small swing. As a result, traders who work in proprietary shops in this fashion will tend to use shorter time-frame charts, using one-, five-, or 15-minute periods. In addition, day traders tend to rely more on technical trading patterns and volatile pairs to make their profits. Although a long-term fundamental bias can be helpful, these professionals are looking for opportunities in the short term.

One such currency pair is the British pound/Japanese yen as shown in Figure 1, above. This pair is considered to be extremely volatile, and is great for short-term traders, as average hourly ranges can be as high as 100 pips. This fact overshadows the 10- to 20-pip ranges in slower moving currency pairs like the euro/U.S. dollar or euro/British pound.

2. Swing Trader

Taking advantage of a longer time frame, the swing trader will sometimes hold positions for a couple of hours—maybe even days or longer—in order to call a turn in the market. Unlike a day trader, the swing trader is looking to profit from an entry into the market, hoping the change in direction will help their position. In this respect, timing is more important in a swing trader’s strategy compared to a day trader.

However, both traders share the same preference for technical over fundamental analysis. A savvy swing trade will likely take place in a more liquid currency pair like the British pound/U.S. dollar. In the example below (Figure 2), notice how a swing trader would be able to capitalize on the double bottom that followed a precipitous drop in the GBP/USD currency pair. The entry would be placed on a test of support, helping the swing trader to capitalize on a shift in directional trend, netting a two-day profit of 1,400 pips.

3. The Position Trader

Usually the longest time frame of the three, the position trader differs mainly in their perspective of the market. Instead of monitoring short-term market movements like the day and swing style, these traders tend to look at a longer term plan. Position strategies span days, weeks, months or even years. As a result, traders will look at technical formations but will more than likely adhere strictly to longer term fundamental models and opportunities. These FX portfolio managers will analyze and consider economic models, governmental decisions and interest rates to make trading decisions. The wide array of considerations will place the position trade in any of the major currencies that are considered liquid. This includes many of the G7 currencies as well as the emerging market favorites.

Additional Considerations

With three different categories of traders, there are also several different factors within these categories that contribute to success. Just knowing the time frame isn’t enough. Every trader needs to understand some basic considerations that affect traders on an individual level.

Leverage

Widely considered a double-edged sword, leverage is a day trader’s best friend. With the relatively small fluctuations that the currency market offers, a trader without leverage is like a fisherman without a fishing pole. In other words, without the proper tools, a professional is left unable to capitalize on a given opportunity. As a result, a day trader will always consider how much leverage or risk they are willing to take on before transacting in any trade.

Similarly, a swing trader may also think about their risk parameters. Although their positions are sometimes meant for longer term fluctuations, in some situations, the swing trader will have to feel some pain before making any gain on a position. In the example below (Figure 3), notice how there are several points in the downtrend where a swing trader could have capitalized on the Australian dollar/U.S. dollar currency pair. Adding the slow stochastic oscillator, a swing strategy would have attempted to enter into the market at points surrounding each golden cross.

However, over the span of two to three days, the trader would have had to withstand some losses before the actual market turn could be called correctly. Magnify these losses with leverage and the final profit/loss would be disastrous without proper risk assessment.

Different Currency Pairs

In addition to leverage, currency pair volatility should also be considered. It’s one thing to know how much you may potentially lose per trade, but it’s just as important to know how fast your trade can lose. As a result, different time frames will call for different currency pairs. Knowing that the British pound/Japanese yen currency cross sometimes fluctuates 100 pips in an hour may be a great challenge for day traders, but it may not make sense for the swing trader who is trying to take advantage of a change in market direction. For this reason alone, swing traders will want to follow more widely recognized G7 major pairs as they tend to be more liquid than emerging market and cross currencies. For example, the euro/U.S. dollar is preferred over the Australian dollar/Japanese yen for this reason.

News Releases

Finally, traders in all three categories must always be aware of both unscheduled and scheduled news releases and how they affect the market. Whether these releases are economic announcements, central bank press conferences, or the occasional surprise rate decision, traders in all three categories will have individual adjustments to make.

Short-term traders will tend to be the most affected, as losses can be exacerbated while swing trader directional bias will be corrupted. To this effect, some in the market will prefer the comfort of being a position trader. With a longer-term perspective, and hopefully a more comprehensive portfolio, the position trader is somewhat filtered by these occurrences as they have already anticipated the temporary price disruption. As long as the price continues to conform to the longer-term view, position traders are rather shielded as they look ahead to their benchmark targets.

A great example of this can be seen on the first Friday of every month in the U.S. non-farm payrolls report. Although short-term players have to deal with choppy and rather volatile trading following each release, the longer-term position player remains relatively sheltered as long as the longer-term bias remains unchanged.

Which Time Frame Is Right?

Which time frame is right really depends on the trader. Do you thrive in volatile currency pairs? Or do you have other commitments and prefer the sheltered, long-term profitability of a position trade? Fortunately, you don’t have to be pigeon-holed into one category. Let’s take a look at how different time frames can be combined to produce a profitable market position.

Warning

Forex markets are more volatile than equities markets. This can be a potential source of profit, but it also comes with higher risks.

Like a Position Trader

As a position trader, the first thing to analyze is the economy—in this case, in the U.K. Let’s assume that given global conditions, the U.K.’s economy will continue to show weakness in line with other countries. Manufacturing is on the downtrend with industrial production as consumer sentiment and spending continue to tick lower. Worsening the situation has been the fact that policymakers continue to use benchmark interest rates to boost liquidity and consumption, which causes the currency to sell off because lower interest rates mean cheaper money.

Technically, the longer term picture also looks distressing against the U.S. dollar. Figure 5 shows two death crosses in our oscillators, combined with significant resistance that has already been tested and failed to offer a bearish signal.

Like a Day Trader

After we establish the long-term trend, which in this case would be a continued deleveraging, or sell off, of the British pound, we isolate intraday opportunities that give us the ability to sell into this trend through simple technical analysis (support and resistance). A good strategy for this would be to look for great short opportunities at the London open after the price action has ranged from the Asian session.

Although too easy to believe, this process is widely overlooked for more complex strategies. Traders tend to analyze the longer term picture without assessing their risk when entering into the market, thus taking on more losses than they should. Bringing the action to the short-term charts helps us to see not only what is happening, but also to minimize longer and unnecessary drawdowns.

How Do You Get Started Day Trading?

The first step to day trading is to learn some of the beginner day trading strategies, while acquainting yourself with the rules and regulations of the market. It also helps to try paper trading to test your knowledge of these trading strategies. When you are ready, find an appropriate trading platform and begin trading with an amount of capital that you would feel comfortable about losing.

What Are the Risks of Day Trading in the Forex Market?

Forex traders typically need to borrow large amounts of money on margin in order to make profitable trades. While the stock market has a maximum margin requirement of 50%, margins in forex markets can be as low as 1%. This means that a tiny adverse movement in the market could be enough to wipe out your entire position.

How Do Forex Traders Make Money?

Forex traders speculate on the relative prices of major global currencies with respect to one another. In addition to betting on spot rates, they can also profit from the relative interest rates of different currencies. For example, traders may sell a currency with a low interest rate to buy one with a higher interest rate, thereby profiting from the difference.

The Bottom Line

Time frames are extremely important to any trader. Whether you’re a day, swing, or even position trader, time frames are always a critical consideration in an individual’s strategy and its implementation. Given its considerations and precautions, the knowledge of time in trading and execution can help every novice trader head toward greatness.