Types of Forex Traders

The greatest beauty in game theory is that there are often many ways to arrive at the goal. It is merely a question of taking the most convenient one.

When watching a game of tennis, you might notice that there are different types of players. Some rely on their length, agility, strength or other attributes, yet they have the same goal. Play one good point after another.

Trading is no different; while there are many approaches to take, your goal is always to focus on finding one good trade after another.

Read on to learn about the most common types of currency traders and how to decide which approach suits you.

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What is Forex Trading?

Forex trading is the process of exchanging currencies, often referred to as trading a currency pair. While exchanging is often done for practical reasons, trading is purely speculative.

When you buy a currency, you are anticipating that it will gain in value versus another one. This can be for several reasons, like shifts in monetary policy or total employment. Yet, it can also be seasonal. For example, currencies whose economies rely on tourism will appreciate in the high season due to higher demand.

The foreign exchange market rose in the 1970s after the U.S. dollar severed ties with gold and currencies fluctuated. Yet, the retail forex market didn’t catch up until the information technology advancement of the 1990s. Today, forex is the largest financial market in the world, with a daily volume exceeding $6 trillion.

Who Can Trade Forex?

Most nonprofessionals who trade forex are not doing it for profit. Those are tourists who exchange their money while traveling abroad. Yet, those transactions are not speculative but necessary, and high spreads make it close to impossible to profit.

While adults can trade forex, retail traders make less than 6% of the foreign exchange market ($360 billion in daily volume). Thus, forex trading remains predominantly a game between the institutions who often act both as a buyer or seller and an intermediary.

The Different Types of Traders in the Forex Market

There are many ways to make money in the forex market. Over the decades, the differences in the approach among traders resulted in the following categorizations.

Day Trader

Every trader who doesn’t hold positions overnight is a day trader. Yet, day trading can vary a lot because it offers several time frames to conduct the analysis. Day traders who prefer quick trades and small wins are known as scalpers. Other day traders try to capture more significant moves in fewer trades, but still within a single day.

The main advantage of day trading is reduced risk (trades are closed in one session) and lower costs as there is no rollover commission (cost to carry the trade overnight).

Swing Trader

Swing traders hold positions between 2 days and up to a few weeks. They generally prefer to use technical analysis, although they have to follow the calendar due to possible volatility spikes on a news event. Typical swing trading strategies use indicators like Bollinger bands, moving averages, Fibonacci retracement and others.

The main advantage of swing trading is that it is a relatively low pace and suitable for part-time traders who don’t have time to monitor their positions continuously. Yet, this comes at a higher cost because of rollover commissions and higher risk due to prolonged exposure to the forex market.

Position Trader

The most strategic of all the trading approaches, position trading is reserved for those who have time, knowledge and energy to conduct research. Position traders focus on long-term price movement, combining fundamental and technical factors.

Yet, the focus is on fundamental research, while chart technicals are a tool to pinpoint the best entry and exit points — to minimize the costs and maximize the profits.

Position traders work on large time frames, usually daily or weekly charts. Their goal is to figure out where the currency market is going and then wait until the rest of the world catches up. This approach requires patience, knowledge and often a reasonably large account to make it worthwhile.

Currency Traders Subcategories

Besides the 3 main types, there are less known but important forex trading strategies in the foreign exchange market.

Scalpers

Scalpers are day traders who trade in a small time frame. Their strategies usually revolve around 1-minute and 5-minute charts with very short trade duration. This approach is dynamic and suitable for adrenaline-seeking individuals. Scalpers prefer a large number of small wins over a few big ones.

News Traders

News trading is not for the faint of heart. Important news regularly means volatility, and volatility equals opportunities to profit. News traders look for large event-driven moves like rate decisions, non-farm payrolls and others.

Trading the news is not suitable for beginners, but in this article, you can learn more about what moves the foreign exchange market.

Algorithmic Traders

Algorithmic trading gained in popularity in recent years after high-frequency algorithmic trading completely reshaped the professional trading environment.

This type of trading relies on computer programs to either signal or enter a trade when preprogrammed conditions are met. Thus, this process can be semi-automated or completely automated. While some traders prefer to build these systems on their own, others buy turnkey black box systems that often deliver lackluster performance.

Creating Your Trading Strategy in the Forex Market

You might read about different foreign exchange strategies online or perhaps even learn them from a friend. While this is not necessarily a wrong approach, you will never replicate the same results. It is because we are all different. If you ask 2 people to look at the same chart, you might get a completely different opinion.

By the time you venture into becoming a forex trader, you’ll likely have some life experience under your belt. So, before you commit to a trading style, it is necessary to be introspective. After all, there are many strategies out there, but there is only one of you.

Frequently Asked Questions