Three different types of traders
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Three different types of traders

Being called a day trader, swing trader or position trader is as much a badge of honor as it is a title. Most merchants entering the field do so through one of these gateways. Depending on which book they have read or which guru they are following at the time, a trader may feel a sense of belonging.

The problem with being a “time frame specialist” is that it holds you back. While any time frame can make you money, there are times when the market dictates which time frame is best. If you don’t listen to the market and insist on trading a specific time frame, you miss out on profit opportunities and limit your success.

The market is the great dictator of deadline decisions. To ignore the rhythms of the market is to make it difficult for your profits to flow and cut your losses as necessary. Being a time frame specialist can limit your chances of managing your losses. Several loss strategies that apply to one time frame can be applied to another time frame, if the trader is willing to look beyond his horizon.

That being said, there are three traditional time frame categories that most traders find themselves in: day, swing, and position. No time frame is superior to another. Each has its pros and cons. The secret to being a successful trading pro is to transition from one time period to another smoothly (if it makes sense) and knowing when it makes sense to do so.

day trader

Investopedia defines a day trader as “a stock trader who holds positions for a very short time (minutes to hours) and makes numerous trades each day. Most trades are entered and closed on the same day.”

The name could be day trader, scalper or active trader, but the process is the same. You execute intraday trades to achieve your profit targets, with the express purpose of keeping your trades flat at the end of the day.

Whether you are trying to win a few hundred dollars or even thousands, the practice is to take many small opportunities throughout the day without risking all of your capital. By minimizing how much you try, whether it’s a few points on the Emini S&P or a couple hundredths of a cent on forex trading, the belief is that you’re risking less and therefore have much greater longevity than swing traders or position. .

On the surface, this logic is sound. Problems arise when the market moves significantly against you when you least expect it, or when slippage occurs, or when there is a spread involved in the quoted bid-ask price. Any one of these three situations can decrease how much you can earn and, at the same time, how much you are losing.

Combine this with a trader’s need to be right about the markets, rather than profitable, and you are in for what could be characterized as a slow death. Every day the trader earns a little, but loses more. As time goes by, he finds that the value of his account slowly erodes, until he eventually has no more trading capital or cannot move forward.

In the end, the demise of the day trader is due to two things: time and commissions. Since day trading is supposed to save you money with a short time frame, conversely it requires more time to monitor, prepare and participate. For those who simply want to earn a little extra money or those looking to supplement their retirement, the commitment can easily outweigh the rewards. Spending 10-12 hours a day in the markets, while mentally challenging, can make retirement feel like a chore for anyone.

The second failure of the day trader comes through commissions. Now even E*TRADE has jumped on the bandwagon and joined the future revolution by offering commissions of 99 cents. Commission rates are playing in limbo around the world, so actively recruit futures and forex traders. The problem is that no matter how low they go, they will always beat the customer. You have to think of the commodity house as a sportsbook. It doesn’t matter which side the client is on, long or short, or if he wins or loses, the brokerage makes money. And the dirty little secret of the industry is the fact that the lower the commissions, the more clients will trade.

Like anything in life, if you think you’re getting a deal on something you buy regularly, you just buy more. That’s how Costco and Sam’s Club work. Those two companies continually make record profits. There is no material difference between the way these retail outlets generate business and trade. The perceived discount in trading encourages traders to trade more. Does this mean that there is less slippage or that the market is less likely to move against you? Nope! Not only did all of his risks stay the same, but he increased his exposure to them simply because it seemed cheaper to do so.

One of the most influential studies on the subject, “Do Individual Day Traders Make Money?” (Brad M. Barber et al., 2004), took a serious look at the phenomenon of day trading by analyzing 130,000 investor accounts. His summary presented many straightforward conclusions, one of which was: “Heavy day traders make gross profits, but their profits are not enough to cover transaction costs.” This is an alarming revelation. If you’re just a day trader, you’re not working for yourself: you’re working for the broker.

swing trader

Investopedia defines a swing trader as “a trading style that attempts to capture profits on a stock within one to four days.”

The level of research that has been carried out on day trading simply does not exist for swing trading. Time frame flexibility means that a trader can hold a trade for a few days or a few weeks depending on the ultimate goal.

Like their day trading counterparts, swing traders try to make a few hundred dollars or more and also try to limit their exposure to the markets by minimizing the amount of time they spend trading. There is an assumption that the market moves in a particular direction, either up or down, for only a finite amount of time before turning back or retracing.

The role of the swing trader is essentially to pick when the move begins and exit right when the move ends. This ability is similar to being able to pick the highs and lows of the market. The swing trader seeks to know when the market will explode with fundamental or technical information and how much profit he can make while moving.

This is an almost impossible task to undertake. Many swing traders tend to be system or black box traders. They want the market to be packaged as a black and white “get in here, get out there” scenario. The problem with this style of trading is that its predictive nature can lead to many false entries and false exits. You can be fooled by false entry signals or exit trades too early, losing all your profits as you chase the markets to catch that last little move.

If the market could be predicted to behave in a certain way, then there would be no need for books, videos and seminars on trading. It would be better for us to learn to read tarot cards or astral charts. The markets are really a microcosm of human psychology along with a dose of inside information.

With the limited knowledge given to the retail trader, it is difficult to choose absolute highs and absolute lows. When trying to trade within these parameters, there is a great need for risk management rather than money management to protect yourself from the unknown.

The weakness of most swing trading is the belief that stopping losses or risking just 2 percent is sufficient risk management. This couldn’t be further from the truth. While less demanding of real-time vs. screen trading, swing trading requires a lot of setup time to determine entry, profit, and loss exits. This preparation time is essential to fix an operation and forget about it. Lack of preparation time coupled with insufficient risk plan leads many swing traders to give up.

position trader

A position trader (trend trader) is defined as “a trader who attempts to capture profits by analyzing the momentum of an asset in a particular direction.” What these position traders are looking to do is make a lot of money, no matter what the fluctuations are from day to day. This is similar to buying and holding stocks. The belief is that there are only two ways to make money in the markets: either you can afford to take quick sniping attacks or catch a trend early on and hang on.

There is good logic in wanting to be a position trader, particularly in the current bull market for commodities. The euro has risen from 0.89 cents to over 1.50 dollars. If you had traded a euro futures contract, you would have made $76,250; If you had held a spot trade in euros, you would have made $61,000. The same thing happened with crude oil. Crude has gone from a price of $12/barrel to over $100/barrel. A position trader who caught that full move would have made $88,000.

Position trading can have great rewards, as the examples above can attest. The core problem with position trading is that only with 20/20 hindsight can we see the actual outcome of buying and holding. During the wild fluctuations of the markets movements it becomes difficult to maintain a conviction. Long or short, trading positions can be disconcerting at times.

Rarely does a market simply move up or down. The peaks and valleys along the way give the illusion that a trend has stopped or a movement is reversing, only to unexpectedly resume. While on the surface these moves may not amount to much more than a few percentage points here and there, the leverage of the margin makes it difficult to sustain trades long term. For example, if you trade a market with 10-to-1 leverage, a 4 percent move against you equals a 40 percent loss.

What trader would be willing to give up 40 percent of the profit to get just 10 percent? None in their right mind, but that is what the position trader is asked of over and over again. Not knowing if the particular market they are trading in has peaked, a position trader must be willing to give up what he has for the chance to earn more. This simple fact makes it difficult for small retail traders to be psychologically and financially prepared to sustain trades long term, even if they know the market will continue in the direction they expect.

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