Types of trading: a complete guide

Trading is the process of buying and selling financial instruments, such as stocks, bonds, currencies or commodities, in order to profit from price differences. Traders look for profitable trading opportunities based on market analysis, news, technical indicators and other factors to predict future price direction and earn profits.

 

Each trader can choose the strategy that best suits their skills, risk profile and available investment amount. Some trading strategies require deep knowledge in financial analysis, while others can be mastered by even the most inexperienced trader.

 

In a new article we consider the main types of trading, as well as the advantages and disadvantages of each of them.

 

Main types of trading

 

 

Day trading, scalping, swing trading and position trading are the four main types of trading. They involve active and passive trading modes. 

 

Active trading mode implies active participation of the trader in the market, execution of a large number of transactions and constant monitoring of the market situation to make quick decisions. In passive trading mode a trader makes fewer trades, changes his position less often and concentrates on the long-term perspective of the market, seeking to profit from long-term trends and tendencies.

 

Day trading

 

Day trading is an active trading strategy that involves buying and selling one or more assets during the day, but without access to the night market, when all positions are closed. Because of the high level of risk, this strategy is traditionally used by market makers or professional traders, although more and more beginners use it for trading.

 

The risk of day trading consists in the fact that constant market movements can affect investment decisions, which are implemented on a short interval.

 

 

Advantages

 

- Quick results. Day traders can see trade results within a short time frame. They do not depend on long-term trends and can quickly react to market movements.

 

- Risk management. Day traders typically close all positions by the end of the trading day, which helps them manage risk and avoid overnight positions.

 

- Ability to profit from short-term movements. Day trading allows traders to profit from small movements in asset prices, which can be especially useful during volatile markets.

 

Disadvantages

 

- Emotional challenges. Day trading requires fast decision making and can be emotionally stressful. Stress and uncertainty can negatively affect the trader and their ability to make rational decisions.

 

- High transaction сosts. Because of the high volume of trades that are executed during the day, day traders may face high transaction costs associated with exchange commissions and spreads.

 

- Need for constant monitoring. Day trading requires traders to constantly monitor the market and react quickly to changes. This can require considerable time and effort.

 

Scalping

 

Scalping is a type of active trading that involves the possibility of making profits on the temporary imbalance between supply and demand. The trades opened consist of small, frequently shifting volumes (in the context of liquid markets), which can allow the scalper to make a good profit margin.

 

Scalpers select trading opportunities using technical analysis, so it is desirable for them to have a good knowledge of the financial world. Initial profits in scalping are low because each trade generates a very small income.

 

 

Advantages

 

- Fast profits. Scalpers seek to earn on small changes in price and make fast profits. By using a large number of trades they are able to collect small profits which add up in the end.

 

- Short position holding times. Scalpers usually hold their positions for short periods of time, which reduces risk from sudden market moves and overnight rolls.

 

- Shorter losses. With short position holding times, scalpers can exit unprofitable trades quickly and minimize losses.

 

Disadvantages

 

- High transaction costs. Because of the high volume of trades executed during the day, scalpers can face high transaction costs due to exchange commissions and spreads.

 

- Difficulties in market prediction. Due to the short-term nature of scalping transactions, predicting the market direction becomes more challenging. Short term price movements can be unpredictable and lead to losing trades.

 

- Emotional challenges. Fast decision making and high activity can lead to emotional stress for scalpers. This requires good emotional control and the ability to make rational decisions.

 

Swing trading

 

Swing trading is a type of investing based on fluctuations in the prices of stocks, commodities and currencies. In this context, a trend reversal in the asset being traded generates high price volatility, providing a potential opportunity for medium-term profits. Therefore, swing traders should have good technical and fundamental analysis skills, including identifying price resistance and support levels.

 

A trader opens a buy position when the price of an asset is at the lower support level. Conversely, if the price is at a high resistance level, a sell position is immediately opened and held for a certain period in order to make as much profit as possible from this trend.  

 

Unlike day trading, swing trading is open to the night market, and less attention is required for higher potential profits. Conversely, the virtual loss per trade is also greater.

 

 

Advantages

 

- Use of trends. Swing traders can exploit market trends and capitalize on rising and falling prices over the medium term. They can benefit from strong price movements that occur within a trend.

 

- Lower transaction costs. Unlike day trading and scalping, swing traders do not make many trades during the day. This can reduce the transaction costs associated with commissions and spreads.

 

- More flexible time schedule. Swing trading does not require constant market monitoring. Traders can set up their positions and monitor the market at their convenience.

 

Disadvantages

 

- Possible losses during trend reversals. Every now and then the market can go into a trend reversal which can lead to losing trades for swing traders. This requires a good risk management strategy and the ability to identify exit points.

 

- Need for technical and fundamental analysis. Successful swing trading requires a good understanding of technical and fundamental analysis. Traders must be able to identify price resistance and support levels, as well as analyze financial data and news that can affect asset prices.

 

- Higher potential for virtual losses. As swing traders hold their positions over the medium term, there is greater potential for virtual losses. Price can move temporarily in the opposite direction, which can cause some uncertainty and emotional stress for the trader.

 

Position trading

 

The peculiarity of position trading is that it can be done both passively and actively. This dual mode is made possible through the use of long-term charts, which track market trends over several days or even weeks. Thus, traders try to exploit the trend by identifying rising lows and falling highs to determine the possible development of an asset.

 

The main disadvantage is that when the markets are highly volatile, position trading becomes much more difficult, as at the moment of trend reversal the trader exits a particular position. This feature makes the position strategy acceptable to few investors during a trend reversal.

 

 

Advantages

 

- Long-term investments. Position traders look at the long term prospects and trends of the market. They hold their positions for a long time, sometimes even for months or years, to maximize profits from a strong trend.

 

- Less stress and emotional strain. Position trading does not require a trader to constantly monitor the market and react quickly to changes. This can reduce the stress and emotional strain associated with trading.

 

- Opportunity to profit from big trends. Position traders can make money on big trends and strong market movements, making the most of large asset price movements.

 

Disadvantages

 

- Difficulties in determining entry and exit points. Determining entry and exit points is a challenging task for position traders. They must be able to identify a trend reversal and make a decision to close a position, which can be a challenge.

 

- Possible losses in volatile markets. Position trading can become difficult during volatile markets when asset prices are subject to large fluctuations. This can lead to temporary virtual losses and uncertainty.

 

- Higher investment capital. Position trading often requires more investment capital because traders hold positions for long periods of time and need to be prepared for potential negative price movements.

 

Summary

 

Several factors should determine the type of trading used, including knowledge of the financial industry and the characteristics of the potential investment. For example, when trading the S&P 500, one can take advantage of high market volatility by opening positions at the time of the fastest price movement. Therefore, this characteristic makes it a very convenient investment for the day trader, despite its high level of risk.

 

Trading is an effective way to make profit, but it is worth considering that it involves certain risks. A trader should be ready for possible losses and know how to manage his capital. Understanding of risk management basics, usage of stop-loss orders and portfolio diversification are the key elements of successful trading.

 

Individual approach and willingness to take risks are factors that can influence the choice of strategy. If a trader can control his emotions and is able to handle difficult situations, he can choose high-risk strategies. Conversely, if emotions can influence his actions, he will prefer to trade with less risky strategies.