Trading Style

Trading Style
trading styles and strategies

Every single trader is unique. We may buy & sell similar assets, but the way we plan our trades, and execute our trades is all our own.

The trading style you adopt is a combination of several factors, notable among them your trading experiences. Right off the bat, it’s important to stress that while trading styles differ by name, the differences between them are mostly theoretical in nature.

Practically, it’s challenging to differentiate and identify one trading style from another. This online trading guide from AvaTrade Australia features all the popular trading styles you will encounter, with a focus on their characteristics and their differences.

This guide is designed to provide you with detailed insights for creating your own trading style.

Table of Contents

What is a Trading Style?

The simplest definition of a trader is an individual who trades financial assets through a trading platform to profit from fluctuations in price. This entails the buying and selling of financial instruments, by going long, or going short. The manner in which you go about this is your trading style.

As a budding trader down under, you can certainly supplement your earnings by dabbling in part-time trading or full-time trading. People get involved in trading for many different reasons. Some are looking for an additional income stream for a much-needed vacation, for enrichment, or to improve their lifestyle.

Online trading went mainstream in 1999, revolutionising the investment arena. Thanks to this breakthrough technology, online trading makes it easy for a broad spectrum of savers to participate in the global financial markets.

Whatever your reasons for trading, welcome to AvaTrade Australia!

With that in mind, you may be curious to learn about the intrinsic elasticity of online trading. This dynamic vocation is not limited by the same constraints as traditional investment practices. With online trading, you don’t have to accept the rather broad frameworks inherent in investment practices.

You can trade with flair, or with caution. You can mix it up as you please, any time you want. The investment arena is expressly reserved for those who wish to invest for the long haul.

It is a specific demographic who are happy to have their available capital locked up for a longer period of time, in the hopes of appreciation. With online trading, there are no limits. You can recycle your capital as many times as you wish to execute orders. It’s your call.

Does that mean that everyone should switch from investing to trading? Absolutely not. Investments are designed to appreciate over time, to provide the much-needed security for retirement, or big-ticket purchases. Trading is a short-term venture with the goal of generating an ROI on your capital.

Whether you should trade or not is a personal decision. If you have the requisite understanding of the financial markets, and you have the available capital will play into your decision. More than that, online trading is about ongoing learning. If you’re prepared to put in the time, learn from your mistakes, and implement effective trading techniques, you could be smiling all the way to the bank.

Successful traders are disciplined traders. They are also analytical, methodical, and goal-oriented. You will likely be required to change the way you assess the financial markets, based on market conditions. Fortunately, there are pre-set strategies for you to choose from. You don’t need to reinvent the wheel. As a case in point, scalping is a form of intraday trading, but it’s also trend trading.

Now that we’ve introduced you to the foundations of online trading, it’s important to differentiate according to specific classifications.

  • Discretionary traders
    This type of trader conducts in-depth analysis of the financial instruments, and the financial markets, and then selects a trading strategy accordingly. Traders focus on technical and fundamental methodology.
  • Semi-discretionary traders
    This type of trader utilises automated systems for identifying trading opportunities. The trading information is then assessed accordingly.
  • Automatic traders
    Traders who use automation construct trading strategies based on mathematical models, and data. This information is then automated, and it functions completely autonomously so that trades run independently.

4 Primary Approaches to Analysis Methodology

There are 4 primary approaches to online trading, including Technical, Macro, Sentiment, and Algorithmic trading. Let’s take a look.

Technical trading

These types of traders are known as range traders, or divergence traders. The methodology behind technical trading is based on price forecasting through historical market data, derived from charts.

Technical trading involves the study of the financial markets by using technical analysis. Most of the data is derived from charts and graphs. Technical trading is predicated on markets behaving according to cyclical patterns. These traders develop mathematical models which attempt to predict future price movements. Among the many technical tools used are support and resistance levels, oscillators, Fibonacci theories, candlestick patterns, and other technical indicators. Technical trading derivations include range trading, and divergence. These disciplines are focused on single analytical tools. We encourage you to read more about this topic on MetaTrader 4 indicators, technical analysis, and central trading.

Macro Trading

Macro traders are known as position traders. These folks study a variety of disciplines, notably the political factors, the social factors, and economic factors that influence pricing of financial instruments.

Macro trading is based on fundamental analysis. This is the detailed study of macroeconomic variables that have the capacity to influence the financial markets. The choices you make as a macro trader are based on the sources of news you reference.

Macro trading is predicated on thorough research, analysis, and cross-referencing of data. Among the many data sources analysed are company financial reports, a variety of financial instruments, cross currency exchange rates, et al. The purpose of this research is to identify overvalued instruments, or undervalued instruments.

The economic factors that are assessed in macro trading strategies include mergers and acquisitions, technical indicators, central bank meetings, interest-rate hikes, indices, inflation figures, employment, and so forth. This is all done in the hopes of anticipating future trends, and pricing of financial instruments.

Macro trading styles are ideally suited to strategic investments over the long-term. However, when you mix these up with technical analysis, it can be an effective medium-term trading technique.

Feel free to read more about macro trading indicators, including: the actions of central banks, fundamental analysis, and fundamental indicators.

Sentiment Trading

Sentiment-based trades are focused on news updates, and market noise. The ‘flavour of the day’ can be considered sentiment-based trading. These include social and emotional factors and the way that traders react to them.

Needless to say, sentiment-based trading styles are difficult to define. Whenever an economic discipline studies the emotionally-based rationale of market participants, it becomes a highly complex topic to tackle. Sentiment traders adopt a perception of the market that is akin to a hive. In other words, the synergistic effect of all of these traders working together combines to move the markets. On their own, these sentiment-based traders cannot effect major changes in the markets.

Investor psychology is central to sentiment-based trading styles. It is a discipline that has gained tremendous traction over the years, and continues to evoke strong responses in the markets. Many of the world’s premier investors, including Bill Williams and Ralph Nelson Elliott hold this discipline in high regard.

Sentimental analysis indicators include a variety of emotional elements, notably euphoria, indecision, and fear/disappointment.

  • Euphoria – traders become euphoric after receiving reassurances or positive news from the financial markets. This reignites hope for successful trading. A classic example of a trading euphoria soundbite is an announcement by government to lift coronavirus-induced restrictions to allow economic activity to resume in earnest. However, euphoria can also lead to exorbitant prices on the markets which result in bubbles.
  • Indecision – this form of sentiment trading typically occurs during an adjustment phase of the markets. You will notice fluctuating price trends, indicative of confusion among market participants, perhaps even disorientation. Indecision usually follows volatility peaks, and will continue until a reorganization takes place.
  • Fear/disappointment – when investors are fearful, they exit the financial markets en masse. Traders follow suit accordingly. This creates a vortex with prices dropping in quick succession. Fear and disappointment are inextricably intertwined, leading to lower prices across the board. If financial reports underwhelm in a big way, if interest rates rise too sharply, or if inflation takes a turn for the worse, fear and disappointment will kick in.

Click here to learn more about trading psychology.

Algorithmic Trading

Algorithmic traders are sophisticated traders by nature. They use statistical and quantum analysis software to identify opportunities in the financial markets. Institutional investors are particularly fond of algorithmic trading.

Algorithms form the bedrock of algorithmic trading styles. This type of trading is designed to uncover opportunities in the markets, and act on them accordingly. Algorithmic trading systems – software – are capable of acting independently, based upon the degree of freedom that the trader wants to have. In a sense, algo trading could be perceived as a branch of technical analysis, since modelling and pattern analysis is used in algorithmic trading.

With this trading style, full automation is possible. In fact, you can eliminate human intervention from virtually every step of the trading process with algorithmic trading. This includes signal generation, market scanning, and entry/exit actions. In truth, any methods can be used to study price action with algorithmic trading. It is much better to use a broader dataset to get more accurate results with this trading technique.

A special subset of algorithmic trading, known as high frequency trading (HFT) is available. Much the same is true for quantitative trading. In both cases, a huge amount of trades are conducted with high-frequency. This would be impossible to implement manually. While algorithmic trading is largely considered the domain of institutional traders and investors, the liberalisation of this technology is bringing it closer to retail traders too.

For now, algorithmic trading remains the domain of institutional traders and investors. These heavy hitters are responsible for bringing tremendous liquidity to the financial markets, if only for a short while, but they can help to correct market inefficiencies.

For more information on algorithmic trading on MT5, click here.

Trading styles according to opening/closing times of trades:

  • Short-term traders
    Day traders and scalpers typically trade anywhere from 1 minute to 1 day.
  • Medium-term traders
    Position traders and macro traders are engaged in the markets from a few days to a few weeks.
  • Long-term traders
    Carry trading, buy & hold trading takes place in a broad timeframe from several weeks, several months, even years.

The Most Popular Trading Styles

There are many operational strategies available today traders, notably:

  • Trading the news – exploit sudden volatility in the market such as news reports, technical indicators, and data
  • Scalping techniques – this has become an independent style of online trading which we will talk more about
  • Candlestick pattern analysis – detailed insights can be gained from this for more technical analysis
  • High-frequency trading (HFT) – another sophisticated strategy for day traders, which will be approached in later sections.
  • Arbitrage techniques for trading – traders who work for big companies and act on their behalf use powerful software to implement arbitrage techniques
  • Trading within support & resistance ranges – this technical form of trading requires knowledge of limit orders, trailing stops, stop loss, et cetera.

Day Trading

This is arguably the most popular form of trading/investing where a trade is open & closed within a single trading day. These types of traders are resilient, given the volatility of the financial markets. While any asset can be day traded, day traders prefer currency pairs and stocks.

The objectives of day traders are clear: generate an incremental ROI on minuscule daily market swings, by using excessive leverage. Naturally, the use of leveraged trades is inherently risky. While profits can be multiplied by using leverage, so too can losses. To mitigate these ill effects, day traders must stick to a strategic plan, and have the discipline to enforce it.

Commission costs can be high with day trading activity, owing to the frequency of trades taking place every day. A keen eye for detail is essential with day trading, as position calculation costs must be factored into the equation in order to determine profitability. A growing account balance over time is the objective.

Day trading is not suited to everyone. This trading strategy is high risk, and traders are required to implement sophisticated techniques to understand the pricing of financial instruments. You have to have a thick skin to become a day trader. Advanced analytical skills must be developed to stay invested in this strategy.

Bad press dented the popularity of day trading over the years, but, a re-education campaign to extol the merits of day trading to serious traders is winning over the crowds. Anyone who tells you that you can get rich quick by day trading is selling you down the river. It is a time intensive vocation that requires extensive learning, understanding, and practice. As a newcomer to the trading scene, the best advice we can give you is read, read, read. The more you know, the better!

There are 2 essential elements required by day traders, notably volatility and liquidity. Volatility determines profit/loss, while liquidity provides you with the option to enter trades/exit trades at the best prices.

Pros
Cons
Excellent for gaining trading experience
Day trading activity is limited to a specific group of assets
Traders get immediate feedback on their buy & sell orders
The use of leverage can be detrimental if markets go against you
You can safeguard day trading positions with protective orders
This form of trading activity entails high commissions and high risk
There are no overnight fees to consider since all trades close out in the same day
A high degree of trading proficiency is required to profit from day trading
Day traders can get discounted rates on commissions due to high-volume activity
 

Register at AvaTrade Australia and enjoy the following benefits:

  • Daily market analysis webinars
  • Competitive spreads for day traders
  • Leverage applicable to your experience
  • Social trading to copy top-performing traders
  • AvaProtect and Guardian Angel to safeguard your trades

Scalping Strategies

Scalping was initially an intraday trading strategy but it gained mainstream appeal, and now scores of traders use this trading technique. They are known as scalpers. With scalping strategies, trading times are conducted in as little as 60 seconds for purists to 15 minutes for traders who utilise scalping in a mixed way. The preferred markets for scalpers are stocks and forex.

With this trading strategy, the premise is that a small price movement – below a pip – with leverage, results in frequently large price movements. Scalpers believe that these are more reliable. Even markets moving horizontally (minimal up/down price movements) are inherently unappealing to traders because there is no clear trend. But for scalpers, there is plenty of opportunity.

Scalpers execute hundreds of trades during a session, and these typically last no more than 5 hours per day. Individual transactions are insignificant with scalping. What is important is the overall scalping strategy. If it is solid, the winning trades will outnumber the losing trades, and profits will be generated. With a set ROI in mind, traders use stop orders to manage market entry points and market exit points. Traders using scalping strategies open multiple trades at the same time.

With quick transactions being conducted at any given time, with increasing frequency, scalping does not depend on patterns and analysis. It’s the trading book – the prospectus – which can be frequently consulted and updated according to the orders in the market. This includes all the buy & sell orders for financial instruments. Each asset will have its own page with the bid/ask orders, trading volume and the bid/ask price represented in columns. All of this impacts supply & demand, which results in a change in the price of the financial instrument. Scalpers are mostly interested in the prospectus to guard against other traders and investors compromising their own strategies.

Everything in scalping is based on exit strategies. These must be clear at all times. Traders look to these exit strategies to close out positions once the risk/reward ratio hits a specific value. If it is 1:1, it is deemed unacceptable for the majority of strategies. Given the short exposure to risk in the market with scalping, and the inclusion of limit orders, this trading style can be highly effective.

There are two commonly-used scalping strategies, called classic scalping and dynamic scalping. The difference between them is how the data is interpreted.  Graphics scalping strategies are also available, and they use technical analysis modelling, designed for the reduced time frames of this trading strategy.

Pros
Cons
Immediate feedback
Leveraged trades
Automation is possible
Stressful vocation
Limited risk for each trade
Steep intraday commissions
 
There are no overnight fees & commissions
 
Protective orders and exit strategies for positions
 
Traders can benefit from increases & decreases in prices
 

Register at AvaTrade Australia and enjoy the following benefits:

  • Competitive spreads
  • Rapid execution of trades

News Trading Strategies

News trading strategies feature elements of day trading, fundamental trading, and sentiment trading. News trading strategies are predicated on the notion that big movements take place in the markets just before, and just after important data has been released, including geopolitical events, and economic indicators. While fundamental analysis is partially beneficial, news trading strategists are focused on the short-term, and not on medium-term, or long-term trends.

The news trader conducts fundamental analysis of the asset, rather than waiting for trends to begin, or price movements to take place. By keeping a finger on the pulse of the markets, news trading strategists listen to the market buyers and adopt early positions, and wait for the right moment to trade. The standard timeframe for a news trader is anywhere from 1 minute – 15 minutes, much like other day trading strategies.

By and large, news traders select periods of maximum volatility, with high attendant risk. Mitigation strategies are possible, including the following:

  • Stop loss and trailing stop loss orders
  • Portfolio diversification strategy since appreciation in one asset category is often accompanied by depreciation in another asset category
  • Constant scanning of social networks and news media for sentiment-based indicators
  • Trading strategies geared towards capitalising off large movements, without knowing the direction of price movement.
Pros
Cons
No detailed preparation required
Substantial experience is required
Minimal time needed for trading purposes
Trades take place during volatile sessions
There are no overnight fees and no rollover fees
A single trade can have an adverse effect on the trading account
If applied correctly, these strategies can be advantageous with large movements
The source of the data has an outsized impact on the reliability of the news trading strategy

Register at AvaTrade Australia and enjoy the following benefits:

  • The security of AvaProtect
  • Trading news updates courtesy of AvaSocial
  • Updated economic calendar with market buzz functionality

Carry Trade Strategies

Carry trading is the process by which a trader speculates on high-interest rate assets with a low-interest-rate loan. This speculative technique is highly risky, since the high-interest rate assets can move either way.

In the forex market, carry trading strategies were common, and popular with currency pairs like the USD/JPY. Nowadays, carry trading is routinely used with any currency pair with a stable spread over the long-term.  Carry trading was popular until the 1980s, thanks largely to the Japanese yen (JPY).

To generate profits with carry trading strategies, in light of the substantial capital requirements and lengthy negotiations, it’s necessary that the interest rates between the financial instruments does not change. Owing to the high attendant risks of carry trading strategies, this trading style is best suited to institutional traders and large financial operators.

Pros
Cons
In addition to trading gains, there are also interest earnings
Exchange rate uncertainty can significantly increase risk
A small outlay can result in outsized profits due to leverage
High degree of leverage can lead to huge losses in the absence of hedging strategies

Register at AvaTrade Australia and enjoy the following benefits:

  • Substantial variety of assets to trade
  • No hidden costs and clear trading conditions
  • Traders can hedge against losses with advanced order protection tools

Trend Trading Strategies

Richard Donchian is the reason trend trading strategies have come to pass. It is based on the proviso that at any point in time, the prevailing price is the result of all vector forces affecting the price. Trend traders largely use technical analysis tools, particularly sentiment indicators, trend indicators, support & resistance levels, and the like.

Naturally, the choice depends on the trader’s timeline. Trend trading is suitable for short-term, medium-term, and long-term timeframes. Many different trading styles are predicated on trend trading strategies, and they are affected by trend trading strategies too. For example, position trading, swing trading, and day trading differ from trend trading since they are limited in terms of their time horizon.

Definition of a Trend: A trend is the graphical representation of price per unit time. If prices rise over time, it is a bullish trend. If prices fall over time, it is a bearish trend. Each chart or graph features an abscissa and an ordinate. At each point on the chart, the price is the result of the intersection of supply & demand.

With trend trading strategies, the focus is solely on following the trend’s price movements in the present time, as opposed to learning about the individual components impacting prices.

Pros
Cons
Trend trading strategies are ideal for managing risk
In-depth study, analysis and monitoring is required
Trend trading allows for the creation of a detailed trading plan
Traders must use a fully functional, reliable trading platform
Trend traders can implement short and long trading approaches
 

Register at AvaTrade Australia and enjoy the following benefits:

  • Professional trading platforms featuring a variety of economic indicators
  • Reduce the learning curve by using AvaTrade’s social trading and copy trading platforms

Position Trading Strategies

Position trading strategies are ideally suited to traders who want to hold onto their positions for months or even years. By dint of this timeline, position traders do not waste time worrying about market fluctuations in the short-term. Their investment horizon is the long-term, and they plan accordingly. In the opinion of position traders, incremental market changes over time add up.

It stands to reason that position trading is the polar opposite of day trading. By sticking to the age-old adage, ‘The Trend is Your Friend’ a position trader works to generate profits over the long-term by using the trend. Day traders use miniscule price movements with juiced-up trades (leverage) to benefit from small price movements through volume trading.

If you are the type of trader who enjoys investments in shares and ETFs (Exchange Traded Funds) then position trading is for you. Position trading strategies are best suited to traders who check the charts every couple of weeks or months to get a feel for the pulse of the market. The basis of position trading strategies is twofold: technical analysis and fundamental analysis.

Bear in mind that position trading strategies are ideally suited to traders who can afford to let capital sit in a portfolio for a long period of time, with attendant rollover costs too. Asset appreciation is the order of the day, so it’s a long-haul investment option.

Pros
Cons
Stop loss options allow for risk mitigation
Position trading requires a detailed study of the financial markets
There is reduced trading stress with position trading strategies
Position trading takes capital out of circulation for prolonged periods of time potentially reducing your earning power
As soon as a position has been opened it doesn’t need to be constantly monitored
 

Register at AvaTrade Australia and enjoy the following benefits:

  • Trade on the move with AvaTradeGO
  • AvaTrade Australia offers you competitive spreads and full transparency

End of Day Trading Strategies

With so many part-time traders in the markets nowadays, end of day trading strategies are gaining popularity. It’s very easy to reconcile private life and work life with this trading strategy. End of day trading strategies focus on opportunities that exist in the financial markets during the closing phases, and sometimes even during the opening phases of the market. There is no need to stay put, watching price movements day in and day out. This type of trading strategy focuses on the activity that takes place after the financial markets have been analysed.

Traders can delve into the intricacies of the financial markets, develop their own strategies, and proceed accordingly. You can set stop loss and stop limit orders, along with other customisable options. These decisions are taken in order to benefit from price movements in the markets. Despite the seemingly random nature of markets, there are discernible characteristics. For example, there are quiet hours, and there are peak hours. During busy hours, there is tremendous liquidity and volatility. But by the end of the day, this particular trading strategy doesn’t rely on liquidity and volatility.

The purpose of end of day trading strategies is to capture overnight returns. Further, realignments between the opening and closing moves of the market take place. Thus, if predictions are correct, rollover costs and associated expenses will be covered, allowing for a generous ROI in the process.

Pros
Cons
Trade according to your prerogative
Accurate calculation of positions
You pick the size of your investment
Leverage must be used to generate profits
Best suited to predictable market hours
In-depth understanding of fundamental analysis required

Register at AvaTrade Australia and enjoy the following benefits:

  • Trading calculator
  • Low spreads on assets
  • Up-to-date economic calendar
  • Expert-driven market analysis

Swing Trading Strategies

Swing trading strategies fall somewhere between position trading strategies and day trading strategies. Whenever the price swings away from the trend, swing trading strategies attempt to capture these deviations and profit accordingly. The time interval for swing trading strategies ranges from several hours to several weeks.

This strategy is easily seen whenever the price of a financial instrument breaks through the lower support level, or through the upper resistance level. Once an asset is oversold, or overbought, the price of that asset tends towards the average range of values – the mean. Whenever this occurs, swing traders will be standing by, ready to swoop in and cash in.

Swing traders spend lots of time studying the trends of asset price movements. They wait carefully for prices to move away from the average range, and then open positions accordingly. Once a retracement occurs, that’s when profits tend to be made. Swing traders are frequent users of technical and fundamental analysis, moving averages (MA), Relative Strength Index (RSI), Bollinger Bands, oscillators, and the like.

Pros
Cons
Carefully plan your trading strategy
High degree of technical analysis required
Mitigate against losses with protective orders
Traders need to remove emotion from the equation
Benefit from positive and negative price swings
Easy to lose money if you don’t implement stop loss

Register at AvaTrade Australia and enjoy the following benefits:

  • Myriad customizable orders to select
  • Plenty of trading platforms to choose from
  • A wide range of financial instruments and technical indicators

In Conclusion: Trading Styles

There is no blanket strategy for traders and their chosen trading styles. It really depends upon the individual trader. The best trading style may be an eclectic combination of trading strategies, or it may simply be a strategy that you can implement effectively.

ASIC & Professional Traders at AvaTrade

Under the legal framework of the ASIC directive, it is imperative that traders fall into one of two classifications: retail traders, or professional traders. Clients will be issued with a questionnaire which must be completed and submitted to AvaTrade customer support representatives. Naturally, professional traders are privy to specific benefits unavailable to retail traders. The main difference between retail traders and professional traders is the amount of leverage available.

According to the ASIC framework, fairness, transparency, and safety are assured for all investors. At AvaTrade Australia, clients have the added benefit of full compliance with strictest guidelines in the industry. Professional traders have access to dedicated trading platforms to identify opportunities, and maximise possibilities. By developing the appropriate skills and strategies, traders can make better decisions, reduce risk, and generate enhanced ROIs.

FAQs Trading Styles

  • Which trading style is best for my needs?

    The answer is in the question. Your trading needs are personal, and the trading style you choose must reflect that. Ideally, the optimal trading style is a function of several factors, notably how much time you spend trading, your appetite for risk, and your preference for specific asset classes. Traders who enjoy fast trading and quick profits are naturally drawn to scalping strategies. Traders who prefer a macro perspective on trading would be better suited to swing trading and position trading. Your trading style largely determines the trading opportunities that you’re presented with.

     
  • What do I stand to gain from momentum trading and scalping?

    Momentum trading and scalping are trading styles which require that positions sell before the close of trade on a single trading day. Sometimes, a scalper may hold a position for just a couple of minutes. Momentum trading and scalping rely on carefully-researched stocks, forex, and other asset classes. By making informed trading decisions, traders can capitalize off price volatility. It is worth pointing out that momentum trading and scalping require an ability to act without compunction. Decisions must be made quickly and effectively. Fortunately, there is zero risk related to overnight price movements with the strategies, since all trades close out in the same day.

     
  • What are the benefits of position trading and swing trading?

    If you’re the type of trader who understands technical analysis and fundamental analysis these may be for you. When you combine them effectively, you can take advantage of long-term trends with position trading and swing trading. Once you identify an asset to hold for several days, it’s easy to spot the trend and to ride the trend.