Types of Trading Strategies
Day traders specialize in short term investments that are opened and closed on the same day. That avoids any risks associated with trades left open overnight.
The strategy utilizes asset price volatility and so it is especially suited to the Forex and securities markets. Day traders tend to focus on relatively small gains over a short time period and possibly repeat the exercise several times a day. It can be a stressful high-intensity trading strategy requiring close attention to market data and movements so as to quickly react when favorable opportunities arise.
Scalping is a technique of seeking very small profits in a very short time frame. It can be considered as an extreme type of day trading. Traders using this strategy might hold a position open for only a few minutes or even just a few seconds until a specified profit target has been met.
Because it depends on identifying patterns as they emerge and riding temporary trends, scalping requires dedicated focus and attention on price movement. Scalpers need to make fast decisions and usually possess a higher than average risk appetite. It takes skill and practice to execute successfully, as a single loss can easily see any daily profits vanish in a moment.
Position trading “nurses” an open position in the expectation of an eventual upswing or downswing based mainly on fundamental analysis and a long term view. This strategy usually factors in potential reverses while the position is open and makes an assumption that the trader can ride them out.
Fundamental analysis used to identify a forthcoming predicted trend is often enhanced with technical analysis to identify optimum market entry and exit points. This trading style suits those who prefer a more relaxed view of moment-to-moment price movement than scalpers and day traders engage in.
If position trading is considered a long-term view, and day trading or scalping are very short term strategies, then swing trading sits somewhere in the middle. It takes advantage of a volatile market where a clear pattern or trend has not yet emerged.
Swing traders anticipate short term price movements and aim to capitalize on them when they occur. They accept the potential risks inherent in leaving positions open overnight, and the risk that the market may take an adverse turn while they are not monitoring it.