The complete guide to trading styles
There are different ideas about how often to trade, how long to hold a position and when to enter or exit the market. But there are four main styles at the core of trading. Learn more in this article.
What is a trading style?
Your trading style is determined by your trading preferences over time, like how often you’ll place a trade and how long you will keep those trades open for. It is based on factors like your account size, how much time you dedicate to trading, your personality and your risk tolerance.
Although your trading style is unique to you, as are the aims set out in your trading plan, there are four popular styles and in order of duration. They are:
Position trading explained
Position trading is a stye which means you hold a position for a long period of time. This could be weeks, months or even years. Position traders are not concerned with short-term market fluctuations – instead, they focus on longstanding market trends.
Position trading often involves opening fewer trades than other trading styles, but these tend to be of a higher value. While this increases the potential for profit, it also increases your exposure to risk. Position traders need to have a large amount of patience to stick to the rules laid out in their trading plan, knowing when to close an investment and when to let profits run.
Typically, position traders rely on technical analysis – using tools such as a Fibonacci retracement which enables them to identify levels of support and resistance.
Swing trading explained
Swing trading focuses on taking a position within a larger move. It entails holding a trade over several days or weeks to take advantage of short to medium-term market movements.
In swing trading, the goal is to spot a trend and then trade the market dips and peaks that provide opportunities for entry points. Technical analysis is used to identify two types of market movements: ‘swing high’, which is when the price moves upwards, and ‘swing low’, which is when the market price declines.
Based on the highs and lows identified, the trader can make the decision to go long or short on the swing point. Swing traders often search for markets with a high degree of volatility, as these are the markets in which ‘swings’ are most likely to occur.
There is no specific time frame for swing trading, as it is completely dependent on how long each trend or swing lasts. This could be as short as an hour or as long as a week. Swing trading is for you if you don’t want to spend all day monitoring the market as can be necessary with shorter term trades, but don’t want to enter a longer-term position either.
Day trading explained
Day trading means a trader will open and close all their positions before the markets close each evening. as a day traders, you buy and sell multiple assets within the trading day, or sometimes multiple times a day, to take advantage of short-term market movements. In doing so, they avoid some of the risks and added costs associated with holding a position overnight.
Intraday trading takes time, focus and dedication to a trading plan. It involves executing a large number of trades for the chance of making relatively small profits– this makes it vital that day traders do not fall prey to the temptation of letting a losing trade run, as it can eat into their profits. To mitigate the risk of losses, day traders often use stops and limits. Attaching a stop-loss to a position will enable a trader to keep their risk at a known level, while limits will lock in any profits.
Other types of trading styles can fall within the category of day trading – such as swing trading and scalping – as they often involve opening and closing positions in a single day.
Scalping explained
Scalping is a trading style that involves you opening and holding a position for a very short amount of time, from a few seconds to a few minutes at most. The idea is to open a trade and exit it as soon as the market moves in your favour – possibly taking small but frequent profits.
Scalping is often considered a much quicker and more intense form of day trading. It requires focus on markets that are extremely liquid and are experiencing strong trends. This enables you to open positions quickly and then get out of them as soon as the market moves.
Scalping is extremely time-intensive. The style is not generally used by part-time traders as it requires a lot of dedication to monitoring the market and time spent performing analysis.
What is high-frequency trading?
As some of these styles require traders to have extremely fast reactions, there has been a growing interest in high-frequency trading (HFT). This is an algorithmic method of trading that large organisations use to execute a huge number of orders in a matter of seconds.
However, it is not widely classified as a trading style, as it relies on the underlying technology to fulfil trades, rather than a trader’s personal preferences or plan. HFT is also not widely available to individual traders.
How to get started with your trading style
You'll probably move from one trading style to the next when starting out, as you try to figure out what works best for you. With practice, you'll find the right trading style for you. You can practise using different trading styles in a risk-free environment by opening a demo account with us. Or, if you feel confident enough to start trading on live markets, you can open a CFD trading account
Bear in mind that CFD trading is a leveraged form of trading, which means that you’ll put up a small deposit (called margin) to open a larger position. However, your profits and losses can easily outweigh your deposit amount, as both are calculated on the total trade size and not the margin amount.
A useful starting point is picking a trading style that is closest to your personality and what you want to achieve. Don’t drop your style at the first sign of difficulty - if you have a good trading plan in place, it should account for what you expect to happen, as well as minor unforeseen market events.
Here’s a simple overview of getting started:
- Do your research about what you think may be your preferred trading style
- Create or log in to your trading account
- Search for your preferred market to trade on our platform
- Select ‘buy’ or ‘sell’ in the deal ticket and choose your position size
- Open and monitor your position
What about trading strategies?
It's important to note the differences between trading styles and trading strategies. A trading style is a plan for how often you trade and how long you will keep positions open for, while a trading strategy is a specific method for defining the price points at which you will enter and exit trades.
Once you've figured out what style works best for you, you would've worked out a strategy. We've compiled ‘The complete guide to trading strategies’ with some of the best trading strategies, so you can incorporate them with your trading style.
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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