The trading style based on time-frames08.03.2016
A good trader in the Forex market is characterized by a developed intuition, sharpened instincts, smartness, and a good selection of timeframes. The selection of the time interval makes it possible to take into account factors that a trader cannot control: Leverage, currency pairs’ particulars, the consequences of news, etc. And although a lot of beginners unfairly ignore the timeframe selection, in the Forex market, it has a strong importance.
When we classify forex traders by time intervals, then, accordingly, they can be divided into three main categories: short-term or day trader, medium-term or swing trader, and position or long term trader.
1. The Day Trader
Generally, this category of traders is recognized as the most attractive. These traders make the opening and closing of positions within one day. They avoid leaving for the next day their open positions, and are making earnings on the volumes. Such traders are trying to ensure an intensive turnover of money. Their trades are generally higher than the standard one by 10 to 100 times. With this tactic they try to achieve maximum profit based on the minor vibrations of the rate.
This is the reason for which such traders prefer to work in a short period of time – with M5, M15, and sometimes H1 charts. Usually the preferences of such market participants are focused on working with volatile currency pairs and technical analysis.
For example, GBP/JPY is considered a highly volatile currency pair. Its fluctuations during one hour can consist in 100 points, while the movement of other currency pairs, such as EUR/USD, EUR/GBP, is kept in the range of 10-20 points.
2. Swing Trader
Swing traders work in the medium term, opening positions in the range from a few hours to several days. Generally a swing trader’s position will be open from one day to one week. The basic calculation of the swing trader is that the profits will be available at the entry point, as he expects that growth of the open position will happen due to a change of the rate. Thus, the correct timing for the opening position acquires even greater significance than in the case of a day trader.
Just as a day trader, swing trader tends to the technical analysis, leaving the fundamental review behind. And yet, in swing traders prefer to use the currency pairs with greater liquidity, such as GBP/USD.
The swing traders cannot do well without analyzing the indicators, search for some patterns or use some strategies based on price action or a mix of indicators.
3. Position trader
The long term trader is focused on long periods of time. Such traders totally differ from the first 2 types of traders because of their market perception. Position traders don’t prefer to monitor how short-term fluctuations of the exchange rate occur, and are watching how the market situation develops in the long term. Their strategies are designed for a length of a few days, months, and sometimes years.
While technical analysis orientation is still present, the long term traders are much more closely related to the fundamental opportunities and prospects. When these traders take positions, they concentrate on economic models, the decisions of governments and interest rates.
The focus of interest is the greatest liquidity currencies: the currencies of some developing countries and the currencies of G8.
It is necessary to take into account the following:
Each category of traders bases its success on a set of specific factors and the choice of time period does not determine everything. For each timeframe, market participants should take into account the circumstances that affect the trading process.
Leverage is considered to be a good tool for day traders. Since the level of fluctuations in the course of day trading is low, it is quite difficult even for professionals to make a profit without leverage. Thus, before opening a position, a day trader makes profit and risk assessment. Swing traders do likewise.
In addition to the leverage, the trader needs to take into account the level of volatility of the currency pairs. It is important to think of the amount of losses and the time when they may happen. Consequently, there should be used trading with different pairs and different time intervals.
If day traders realize that the fluctuations of GBP/JPY could reach 100 points per hour, they can use this information. For swing traders the importance of such information is not such relevant, as they direct the efforts on the earnings in the change of the trend. For this reason alone swing traders prefer the popular currency pairs, involving the major currencies, as the latter have a high liquidity compared to other currencies. For example, if the choice would be between EUR/USD and AUD/JPY, a swing trader will choose the first pair.
Publication of scheduled and unscheduled news, as well as their implications for markets, should always be monitored and any traders. They should have the skills of assessing consequences of such publications when opening a position, no matter what kind of news: economic, press conference of regulators, or anything else.
The most strongly affected by such news are the day traders. For swing traders, the impact in many cases may be negligible. Based on this, a number of market participants are practicing long term trade, which allows avoiding the problems specific for day traders. This tendency is observed on the first Friday of each month, when non-farm payroll data in the US is published. Traders, with inclinations for short time interval, have to deal with bursts of volatility. However, if there is a longer-term perspective, the trader is better protected because the long-term trend, as a rule, does not change.
The choice of the timeframe remains at the discretion of the trader. However, combining different approaches in order to make a profit is one of the best decisions.
For any trader it is important to properly select the timeframe. When a market participant sells a Forex strategy, it is imperative to take into account the timeframes, no matter the trader's preferences. This will allow the Forex trader to choose the correct direction of movement and be successful.
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