When it comes to trading FX, there are a variety of different styles that one can adopt. These depend on a preferred time frame, personality type, funds available, and trading philosophy. In general, there are three types of styles: position trading, swing trading, and day trading. Each is defined by their holding periods.
Position trading is most similar to buy and hold investing in stock markets. Position traders usually hold trades for a few weeks, months, and sometimes years. They base their trading decisions on fundamental analysis. This involves analyzing macroeconomic data for various countries, and taking positions based on which countries are likely to perform better relative to others. Because of the long-term nature of trades, stops are kept wide, and profit targets are kept high. This is necessary because there can be a lot of short-term fluctuations before fundamentals move currencies in the way we expect. Position trading requires the lowest time commitment - usually a couple of hours a week to analyze country fundamentals and keep up with what is happening in the market.
Swing trading falls in between position trading and day trading. Swing traders are looking to take advantage of trends that occur over a period of days or a couple of weeks. They rely mostly on technical analysis to determine entry and exit points for their trades, but also need to keep up to date on the fundamentals so as to be aware of longer-term trends. Swing trading, which is far more involved than position trading, requires that one keeps up with what the market is doing on a daily basis. Both profit targets and stops are smaller relative to position trading. The time commitment involved is usually a couple of hours per day.
Day trading is the most involved one can be in the market. Day traders will hold trades for a day, or hours, or even a few minutes. They do not hold any positions overnight, and constantly monitor the market while they have positions. They rely a lot on intraday technical analysis, as well as keeping up to date with various news items coming out during the day that can affect the market. Profit targets and stops are very small. Day traders look to make money from the volume of trades, rather than profits from particular trades. The time commitment involved is full time - day traders need to be trading whenever the market is open.
So which style is the best? The answer is that it depends. Day trading offers the potential for the highest returns, but is also most likely to result in financial ruin. Position trading offers lower returns, but one is more likely to be successful, and swing trading lies somewhere in between. Time commitment is a big factor. If one has a demanding full time job, only position trading might be possible. If one has a full time job but can spare a couple of hours a day, then they can swing trade or position trade. Finally, a day trader needs their full time to be devoted to trading.
The best style of trading also depends on one's trading philosophy. Some traders have a strong belief in using fundamental analysis, in which case they should be position traders. This is often the case for those who invest in stock markets (where decisions are based on a company's fundamentals). Others that have a preference for technical analysis should be swing or day traders. Of course, one can and should use both forms of analysis when trading, but invariably traders have a preference for one over the other.
To those who are new to FX trading, I would recommend starting out as a position trader or swing trader depending on whether they prefer to use fundamental or technical analysis. As it is important to understand both forms, a new trader should take the time to learn both and then decide which way they want to go.
Asad is an Economics Graduate from The London School of Economics who has also been a part of the currency derivatives team of Deutsche Bank in London. Currently pursuing his PhD at the University of California San Diego where he's researching on Algorithmic Trading Strategies, Asad will be your direct line for answers to all the questions you might have on short-term investing. A part of the Equitymaster Team since 2010, Asad has been sharing his knowledge on short term trading strategies with our valued readers, like you, through our various services. In fact, at the last count, his weekly newsletter, Profit Hunter, was being delivered to more than 100,000 smart traders across the world!