What is a forex trader?
A forex trader, also referred to as a currency trader or foreign exchange trader, refers to a person who trades currencies on the forex market, meaning executing the process of changing one currency into another currency.
Forex is a portmanteau of foreign currency and exchange.
Forex traders aim to generate profits from changes in the values of different currencies in relation to one another.
Forex trading is like a ‘two-edged sword.’ It can be extremely profitable, but it also involves significant risks of considerable losses.
Types of forex traders
There is no consensus about the exact number of types of forex traders. Depending on the criteria used, the number varies from four to six types of forex traders. This article will focus on the following types of forex brokers: Day traders, scalpers, swing traders, position traders, algorithmic traders, and event-driven traders.
Day traders
Typically, day traders keep their trading positions for only a few hours and close their trading positions before the closing of a session or a trading day.
Day trading, one of the most popular forex trading strategies, implements analysis of price charts with time frames of 15 minutes, 30 minutes, and 1 hour.
Usually, day traders spend 3 – 5 hours a day trading, focusing on a quick turnover rate.
Successful day traders are ready to respond to quick price changes and tend to rely more on technical analysis and volatile currency pairs.
Day trading benefits day traders in some ways:
- Trades are not affected by negative news that can break after the closing and opening of the market. Subsequently, trading is not greatly exposed to market and systemic risks.
- Profits can be realised much faster in comparison to more traditional trading strategies, allowing for a more regular cash flow.
Scalpers
Forex scalpers buy or sell currency pairs and then hold them for short periods of time, from a few seconds to a few minutes, for example, 15 minutes.
Scalpers aim to capture very small amounts of pips as many times possible during the most liquid (busiest) times of a trading day, generating small profits from each quick trade.
A forex scalper is required to:
- quickly process new information,
- react to rapid market changes,
- be observant, and
- stay calm under pressure.
Swing traders
Swing traders are traders who hold on to trading positions for time frames from a few hours to several weeks. Swing trading is viewed as a medium-term trading strategy.
Usually, these traders execute an average of 3 to 6 trades a week, aiming to generate a large number of pips in profit (100 to 300 pips).
The goal of swing traders is to initiate trades on swings to highs and lows over a longer time period.
Position traders
Position traders hold trades for longer time periods as is the case with day traders, scalpers, and swing traders. The time frames may vary from several weeks to several years.
Their main objective is to make a large number of pips (300 to 1 000 pips) per trade.
Trading strategies of position traders comprise, inter alia, the following aspects:
- Trading decisions are based on fundamental analysis, allowing fundamental themes, economic models, and decisions from governments to be the predominant factors.
- Price-performance over sustained long-term time frames is preferred above short-term price fluctuations.
- Patience is required because a trader’s money will often be locked up for long periods of time.
Algorithmic traders
Algorithmic traders utilize high-frequency algorithms to execute trades for them at the best possible prices.
Simply put, an algorithm is a set of specific instructions designed to perform a defined task. The task can be a simple process, such as multiplying two numbers, or a complex one, such as one used by forex traders to place trades for them.
In forex trading, computers execute user-defined algorithms, characterised by a number of rules such as price, timing, or quantity that decide trades.
There are four basic types of algorithmic trading utilised in financial markets:
- Auto-hedging: Is a trading strategy with generated rules that reduce a trader’s risk exposure.
- Statistical: Refers to an algorithmic strategy, aiming at profitable trading opportunities based on statistical and historical time series data.
- Algorithmic execution strategy: A strategy that aims to perform a predefined goal, such as reduce market volatility or execute a trade quickly.
- Direct market access: Refers to the most favourable speeds and lower costs at which algorithmic traders can access and connect to various trading platforms.
Typically, algorithmic traders are comfortable using technology and to apply it in forex trading to their benefit. This type of trader will also have the ability to recognise and interpret technical price charts.
Event-driven traders
Event-driven traders prefer fundamental analysis to technical price charts to inform their decisions.
Event-driven trading is a type of strategy used by traders that aim to benefit from price spikes caused by political and economic events. For example:
- Political events: A government with economic policies that harm a country’s economic growth is replaced by a new government with a clear and sound economic policy that will enhance a country’s economic growth.
- Economic events: A country’s GDP figures, unemployment rate, inflation rate, and other important economic indicators.
This type of trading is used by traders who understand how events can impact financial markets and who are skilled at processing new information.
Concluding remarks
Some traders may use one trading style almost exclusively, while others may use a variety of trading strategies.
No trading style is guaranteed to work all of the time, nor need it to be static. However, always changing a trading style can be detrimental to a trader’s trading account, causing considerable losses.
Whatever your style, there is always space to grow and develop.
No matter what your preferred style is, you have to ensure that it suits your personality and risk profile.
Note: This article does not intend to provide investment or trading advice. Its aim is solely informative.
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