Types of Forex Traders: Their Strengths and Weaknesses

There are different types of forex traders grouped based on their trading style. While some traders open 2 to 4 trades a day, some other types of traders may just be getting started at 15 trades a day. Some traders will argue that opening lots of trades a day is not healthy behavior for a forex trader.

While this may be true for some traders, others can get accustomed to opening lots of trades a day and may find it quite normal. Some also argue that entering 2 to 3 positions a day will not bring in enough profits for a trader. The truth is any type of trading can be profitable with the right discipline and strategy.

In this article, we explain the different types of forex traders, their advantages and disadvantages, and how to get the best out of your forex trading style. But firstly, who is a forex trader?

Who is a forex trader?

Unlike most professions, you do not need a degree or pass a test to qualify as a forex trader. A forex trader is simply any individual who capitalizes on changes in the value of currencies around the world to generate profit.

This means that once you watch out for changes in the price of currencies and buy or sell such currencies based on metrics you watch out for you can put that forex trader tag on your profile.

Now to get to the main topic of the day, what are the different types of forex traders?

The 4 types of forex traders

There are various metrics to use for grouping forex traders. There is no perfect textbook definition for the different types of forex traders. Forex traders are generally grouped based on various metrics. These criteria for grouping forex traders include

  1. Based on the amount of time spent studying the charts.
  2. Based on the number of trades opened per day.
  3. The amount of profit in pips gained from a single trade.
  4. The form of Forex Analysis they majorly use.

These criteria sum up the general basis of grouping forex traders. We will explain them later below.

As stated earlier, many other factors can be used to group forex traders. If we decide to use all of them, we could end up with a whole course on types of forex traders. So why not group traders according to your metric and let’s talk about it?

According to the criteria above, there are four types of forex traders

  1. Scalpers
  2. Day Traders
  3. Swing Traders
  4. Position Traders

We will now go into detail about these types, their advantages and disadvantages

Scalpers

Scalping is a very popular forex trading technique. Scalpers are forex traders who enter positions and hold for a short period of time from a few seconds to minutes before they exit.

They aim to profit from small movements in price value. As expected, such movements generate very little profit, hence scalpers tend to open many trades in a day. Scalpers can open up to a hundred trades in a day. Bad trading habits should not be considered scalping.

For example, we had an experience where one of our students placed up to 20 trades in a day. Now this student was taught to be a swing trader. So, this behavior surprised us. After looking into the situation, we notice that when he entered a trade, he faced doubts, got scared, and exited the trade. He simply repeated this process with various pairs.

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Of course, he always ended up in net loss. The point is traders shouldn’t confuse multiple entries due to FOMO with scalping. Scalpers are intentional about entering lots of positions in a day, and with the right scalping strategy, they gain profit from it. Below we give a list of actions most scalpers take to ensure they profit from the market.

How do I recognize a scalper?

  1. They do not stay in trades for a long time, scalpers trade by taking plenty bits of profits (and losses) from the market.
  2. Scalpers spend more time on the chart while actively trading. Other types of traders such as day traders or swing traders may analyze the charts, place trades, and leave the trades to run. But the nature of scalping requires scalpers to stay glued to the charts opening and closing trades.
  3. Scalpers may not need to make use of stop-loss orders. Stop-loss orders help when the trader is not available to close losing positions. They are also used to stop price movements that are too fast to close manually but slow enough to be caught by a stop-loss order.
  4. A scalper’s best poem is Little Things by Julia Carney. Don’t bother about the source of this information.
  5. Scalpers live in the moment. They can stay actively focused on the market making decisions in seconds.

These are a few ways to recognize a scalper when you see one. Now how do you become a successful scalper? It is not enough to open lots of trades.

One can stay in a trade for seconds but with a huge lot size. Such a trader is also a scalper, the increase in lot size means more profit for tiny price movements. It also means greater losses, the type that could wipe an account before it can be closed.

To become a successful scalper, you must satisfy the following criteria

How do I become a successful scalper?

  1. You should devote your time and undivided attention while trading. For example, you don’t want to have a group of open positions and then a call comes from your boss or your dad which you MUST answer. It could end badly in such a case. Scalpers don’t need to be full-time forex traders, but while trading, there shouldn’t be other distractions.
  2. Scalpers should have a clear mind and fast fingers. A clear mind because excessive thinking may delay decision-making. That is to say, overthinkers may not make the best scalpers. Fast fingers because you need to be able to open and close plenty of trades within a short period.
  3. You should have a working trading strategy. Scalping is not just a random event. Scalpers need to be able to predict short-term price movements and take their bits out of it.

Below are some advantages and disadvantages of being a scalper

Advantages of being a scalper

  1. Scalpers spend more time watching the charts and so will spot lots of trading opportunities.
  2. Entering and exiting trades quickly minimizes the losses scalpers incur for every losing trade.
  3. Traders with small account sizes or capital can scalp with smaller lot sizes to reduce risk during trading.
  4. They make profits very fast.

Disadvantages of being a scalper

  1. Opening lots of trades also means lots of initial losses due to spread.
  2. It demands a lot from the trader such as focused attention on the charts for long periods which could be draining.
  3. Spending lots of time on the charts can lead to the temptation of entering trades that you “feel” will end in profits.
  4. On bad days, which could be more frequent than expected, one huge loss is enough to wipe out tiny profits made by scalpers.
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Types of Forex Traders - Scalpers
Types of Forex Traders – Scalpers

Day traders

These are traders who open and close all their trades within a day. By definition, scalpers are also day traders. Investopedia groups scalping under day trading strategies.

Day traders are those types of traders whose trading style falls between scalpers and swing traders. They do not open as many trades as scalpers and may stay in trades for longer periods.

A day trader identifies the direction of the market and may use any means such as indicators or candlestick patterns to determine entry points. Day traders generally prefer to exit enter and exit a trade on the same day to avoid unexpected situations such as gaps.

Now just like a scalper, a day trader will prefer trading in periods of high volatility. This will make the market make more movements in a short period such as a day. Days where the price makes an overall movement of 30 pips will be less favorable than days where the price moves over 100 pips. Some articles and publications group forex traders into three types where scalpers are considered day traders.

How to know a day trader.

  1. As explained earlier, they open and close all their positions within a day
  2. Day traders mostly use technical analysis to determine price direction and entry points.
  3. Day traders stay in trades for longer periods than scalpers but shorter than swing traders.

Some advantages and disadvantages of scalping also apply to day traders.

Swing Traders

Swing traders are those who profit by entering and exiting positions at the swings of the market. The swings are basically the points where the price makes major changes in direction. These are the highs and lows.

Using the 15min to 4-hour timeframe, swing traders take advantage of this price movement. They try to determine these highs and lows or reversal points using technical analysis. These types of forex traders don’t have a fixed time when they must exit trades. The time the price will take to move from one swing to another is not fixed and can be faster during periods of high volatility.

Do you try to enter at reversals or retracements and place your take profit at highs or lows? Then you are most likely a swing trader. Swing traders can stay in positions for hours to weeks depending on the target and timeframe of analysis.

How to identify a swing trader.

  1. They are concerned with the bigger picture and mostly do their major analysis at night when they are done with work or school, or during weekends.
  2. They mostly use technical analysis as their main tool for predicting market direction. Swing traders can also use fundamental analysis, especially watching news that has a huge effect on the market such as the non-farm payrolls.
  3. Swing traders take risk management seriously and most try to have a risk-reward ratio starting from 1:2 upwards. The risk-reward ratio is the ratio of the amount you lose if your stop loss is hit to the amount you gain if your take profit is hit.
  4. Swing traders usually complain about missed trades.

To become a successful swing trader, you have to understand swing trading conditions and take advantage of them.

How to become a successful swing trader

  1. Spend less time on the charts. As a swing trader, major opportunities usually occur less frequently. Spending lots of time on the chart may cause you to see lots of false trading opportunities.
  2. Risk reward ratio. With the right risk management strategy, even a 30% profitable trading strategy can bring in profits for any trader.
  3. Have a working trading strategy. Yes, all traders must have a trading plan or setup that works. It should have a degree of accuracy. At every point in the market, there are reasons to both buy and sell. This is why all types of traders must have a working trading strategy that has been tested.
  4. Get familiar with your trading style. Understanding their trading style helps swing traders know when trading opportunities are likely to show up based on several signals from the market. For example, the price is close to a strong support zone. The trader knows that in some minutes or hours, a trading opportunity is likely to show up. This will help prevent missed trades.
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Below are some advantages and disadvantages of swing trading

Advantages of Swing Trading

  1. Swing traders don’t have to spend lots of hours monitoring the charts. This gives them the chance to use forex trading as a side job.
  2. Swing traders earn more per trade for the same lot size when compared with day traders and scalpers.
  3. They are not constrained to having to close all trades in a day. Their trading strategy allows for leaving trades running for as long time as is needed to make profits.
  4. Swing traders use higher time frames, 15mins, 30mins, 1hr, and 4hr, and even the daily time frame for the overall picture. The higher the timeframe the more accurate price action tends to be.
  5. They take fewer trades which means lesser losses due to spread.

Disadvantages of Swing Trading

  1. Spending less time on the charts can lead to missing out on trading opportunities.
  2. Swing traders’ setups are usually affected by stop hunts, fake outs, or other manipulations.
  3. They have to wait a relatively long time to take their profits.
  4. In the process of waiting for the price to hit their take profit, the price can reverse and take out their stop losses. Swing traders try to prevent this by trailing their stop loss.
Types of Forex Traders - Swing Traders
Types of Forex Traders – Swing Traders

Position Traders

Position traders are forex traders that hold trade for a long time from several months to several years. They can be seen as the investors of the forex market. Although they differ from traditional investors in various ways.

Traditional investors aim to build a portfolio of well-performing securities. This is not the case with position traders as they aim to profit by buying at the base of a trend and selling at the top. Position traders are concerned with the overall picture of the market and don’t bother about small price fluctuations.

Advantages of Position Trading

  1. Position traders spend less time on the charts. Unlike scalpers or day traders who have to actively watch their trades, position traders leave trades running for up to years and don’t have to constantly check their positions.
  2. Tiny movements such as stop hunts or fakeouts mostly do not affect position traders.
  3. Position traders pay less transaction fees. Since position traders open fewer trades, they lose less in terms of spreads. The more trades you open in forex trading, the more initial losses due to spread, and the more profits your brokers make.

Disadvantages of Position Trading

  1. Position traders must exercise a high level of patience.
  2. They must get used to seeing trades go hundreds of pips against them.
  3. Profits come in later than usual for position traders although larger than other types of forex traders.
Types of Forex Traders - Position Traders
Types of Forex Traders – Position Traders

Conclusion

It is essential to know what type of forex trader you are. With this article, you should be able to know the strengths and weaknesses or advantages and disadvantages of each type of forex trader. By now you should also know how to be successful depending on your trading style.

Information on Day trading and how to be successful as a position trader may be missing due to our lack of experience in those aspects. If you feel you have something to tell us, feel free to contact us.

References

What Is a Forex Currency Trader? – CFA Institute

What Time Frame Is Best For Trading Forex? – Daily Price Action