Many analysts, trading tutors and market commentators, will often discuss the various trading styles and suggest that novice and intermediate level traders should become aware of the four key classifications and match their psyche accordingly to that trading style. The four key trading styles being; scalping, day trading, swing trading and position trading.
However, and despite in some ways being sound advice, as an opinion it has critical faults. Firstly; as a developing trader our malleable psyche hasn’t necessarily formed in relation to trading, in short we don’t know what our trading mentality is until we’ve engaged in the occupation for a significant period of time, perhaps several years. Secondly; we adapt to our new profession in many ways, time constraints being one. In theory we may think we have a leaning towards being a scalper, but would never have the time to develop the required skills.
Unless we’re available to manually trade when key economic calendar data is released, or have developed a sophisticated automated trading strategy (our own algorithmic trading model) then we’re unlikely to be able to take advantage of quick moving opportunities, therefore rendering the psyche question obsolete. And making ourselves ready at any given time, to quickly open and close a trade inside seconds or minutes according to releases, isn’t necessarily the activity many think it is, as hard data can either: come right on, miss, or beat forecasts and still hardly move a currency pair, as the data result has already been priced in.
Thirdly; how much money we have to capitalize our first account and how much money we have set aside to risk towards our new profession or hobby, can also determine what trading choices we take at the outset. If you’re a position trader, or swing trader you may need a larger account size to profit. Sure we can use a position size calculator to adjust our risk per trade to keep it at, for example, one percent for a swing trade, perhaps two percent for a position trade, but we couldn’t possibly risk such sums on an algorithmic driven scalping strategy.
Which trader type are you?
So our constraints regarding: time, money and our psyche will (or should) determine our trading choices, not a character assessment, which may be inaccurate and based on tools that we determine are correct, versus the accepted science. We should avoid curve fitting our findings to decide what type of trader we are.
Perhaps we should add in a new criteria to judge where we’re trying to fit in, whilst thinking outside of the normal criteria; where do most retail traders trade, where are they most likely to succeed. Imagery can prove to be a valuable exercise in our industry; would we fish in a fast moving part of a stream, where we’re isolated and no fish are ever caught, or would we fish further upstream, where many are fishing, because that’s where the fish bite? We deal in a business and industry of probability, therefore asking the question; “where am I most likely to succeed, based on historical performance of others?” is a highly effective exercise.
Searching for the answer to this question can be tricky as brokers can’t provide it, the various authorities in certain jurisdictions such as the USA and the Eurozone, insist that brokers provide details on the percentage breakdown of losing and winning trades and individuals, but that’s as deep as the information gets. For a breakdown of where the crowd trades and where success lies, it’s often best to refer to various trading forums. Although it’s unscientific, it would appear that the majority of successful retail trader’s day, or swing trade. Now naturally there’s caveats contained within that claim; experience, exaggeration, what actually represents success etc. For example; a higher percentage of swing traders may be profitable, but a higher percentage of day traders may take (what we consider to be) a living wage out of the market.
Rather than try to analyze our psyche, by applying some form of introspection to our behavior, in order to attempt to identify what type of trading would suit us, we should ask ourselves the following:
• what our goals are (in terms of full or part time, hobby or eventual profession),
• how much time we can genuinely dedicate to trading,
• how much cash we can initially experiment with
• where our likelihood of profitability exists
Psyche is an issue, for example we may have an inbuilt aversion to ever holding traders overnight, but trying to match our psyche to a trading style at the outset, could be entirely the wrong approach.
« WEEKLY MARKET SNAPSHOT 23/10-27/10|The ECB rate decision, its potential bond purchase reduction and the latest USA GDP figure, will be in sharp focus over the coming week USA equities rise for sixth week, as markets appear to be immune to any negative hard data, yen rises as Abe appears on target to win Japan’s election with increased majority »