Dany Mawas, regional director at Infinox Capital, unpacks one of the most important aspects of online trading and how new traders can settle on the right trading style.
Online trading continues to enjoy growth as young and digitally savvy people consider alternative forms of generating income. Each day more people are learning about its features, benefits, and potential profitability. With accessibility to online trading platforms steadily improving, this industry will no longer be for the few, but rather for the many.
Often new traders will experiment with a variety of trading styles and strategies as they first familiarise themselves with online trading, attempting to settle on one which best suits their lifestyle and funds. Finding the right trading style can be a dizzying experience, which is why demystifying this early stage for new traders is crucial for the continued success and wider adoption of online trading.
Trading without having decided on a set approach that you understand and believe in is a sure recipe for failure. An effective strategy should inform your decision-making, guiding you even in times of uncertainty. Whatever the strategy you choose, have the courage of your convictions, and expect that there will be highs and lows.
Each of these trading strategies is viable and can bring success. However, it’s important to note that markets are ever-changing, reacting to the world around us. Keeping abreast of the dominant trends in the online trading space will allow traders to pivot and adjust their strategy accordingly.
Generally, trading styles can be broadly categorised into two, active and passive trading. Fundamentally, active traders believe that ‘beating the market’ is how real profits are to be made. Passive traders, on the other hand, believe that holding onto a position despite short term fluctuations ensures greater long-term returns. Some of the most common active trading strategies include:
Position trading
Position traders can be categorised as cautious individuals who have the time to conduct thorough research. Traders aim to hold onto a position for the long term, weeks or even months.
These traders attempt to gauge the general market direction, spotting new trends by considering longer-term charts and other resources and information. Once traders believe they’ve identified a trend, they’ll attempt to ‘ride the wave’ over some weeks or even months, exiting the position only once the trend breaks.
Position traders will hold trades through short-term volatility with the long-term goal as a target. As such, and their generally cautious nature, they tend to avoid highly volatile markets. This is especially true when their trading strategy uses leverage.
Swing trading
The ideal swing trader is a highly organised individual with limited time to dedicate to trading activities. Swing trades are medium-term positions that are conventionally held onto for a few hours to a couple of days.
Often swing traders enter the fray during moments of market volatility, following the breaking of a trend. This volatility poses risks, which is why traders tend to hold a position for no more than a few days. For this reason, swing traders favour markets that generally move in one direction and are not prone to sudden swings.
Scalp trading
Decisive individuals who want to see immediate results utilise scalp trading. For scalp traders, the lifespan of a trade can last only a few minutes.
Scalpers exploit temporary imbalances in markets, capitalising on regular occurring but small moves. To manage their risk and reward, sizing their trades correctly is important. To take advantage of small price movements, larger positions are required. Scalp trading is one of the most popular active trading styles, with traders often waiting on news events to catch these short-term moves.
Day trading
Similar to scalp trading, day traders buy and sell all within the same day. The advantage of this approach is that it removes the risk of large overnight moves. This means that at the end of each day, when traders close their position, they will know whether they have made a profit or loss.
Day trading was once reserved for specialists and market makers. However, the wide adoption of electronic trading technology has popularised this approach among new or novice traders.
The world of online trading is now an open secret and everyone can participate in the market, irrespective of expertise, lifestyle or personality. The strategies we’ve outlined are just the most common, the trading rabbit hole goes far deeper. What is imperative for all new traders to understand is that each of these strategies come with associated benefits and risks that should be well considered. Knowledge is power and having a well-rounded understanding of the online trading landscape is ultimately one’s best ticket to success.
Editor’s note: Know the difference between short-term trading (speculating) and long-term investing. With short-term trading the risks are high and, depending on the instruments traded, you can lose more money than you invest.
PERSONAL FINANCE