Understanding Different Types of Forex Traders

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With over $6 trillion in daily turnover, the Forex market is bound to attract different types of traders. These Forex traders have different strategies of how and when they enter and exit a position. It is based on these Forex trading strategies that Forex traders are categorized into four distinct categories; day traders, scalpers, position traders, and swing traders. These categories are distinguished by the time between initiating a trade and exiting it.

Forex Day Traders

As the name suggests, these are Forex traders who make their trades daily and ensure that none of their positions remains open overnight. The positions opened by a Forex day trader do not necessarily need to stay open for the whole day. Sometimes these positions only last for a few hours.

Forex day traders have a set target of a minimum number of pips they aim to achieve. Once they attain their goal, they close out their positions. If a day ends and they have not made their target, they exit their positions.

Due to their intraday Forex trading nature, the day traders prefer trading sessions with high volatilities. To capitalize on the intraday Forex trading, day traders trade high volumes of highly liquid and volatile currency pairs. The knowledge of the different Forex trading sessions around the world offers Forex day traders an invaluable insight on volatility.

Forex chart
Source: CAPEX.com Global Forex Broker

Forex day traders entirely rely on technical analysis when making their trades. The day traders use different timeframe charts to establish the market trend before joining in.

Let’s look at the examples below.

Forex Day Trader 30-Minute EUR/USD Chart

Source: CAPEX.com WebTrader

In the above 30-minute EUR/USD chart, the pair is on a downtrend as the candle is crossing the 20 EMA. To confirm a downtrend before opening a trade, the Forex day trader will use a 1-hour chart, as shown below.

Forex Day Trader 1-Hour EUR/USD Chart

Source: CAPEX.com WebTrader (capex.com)

This chart confirms that the pair is adopting a downtrend, giving theForex day trader the signal to short the EUR/USD pair.

Forex Scalpers

These are Forex traders who open and close position within seconds. Forex scalpers do not hold Forex trades open more than minutes.

Forex scalpers aim to gain few pips within seconds, for as many times as possible within a day. Similar to the Forex day traders, Forex scalpers prefer trading during the most volatile periods to benefit from price spikes. If applied well, this trading strategy can enable forex scalpers to make small but consistent profits throughout the day. It is worth noting that the best forex brokers provide all traders with negative balance protection.

Due to the rapid nature of Forex scalping, most of the Forex scalpers opt into using automated trading scripts.

Here is a look at how Forex scalping works.

Forex Scalper 1-Minute EUR/USD Chart

Source: CAPEX.com WebTrader

From the above 1-minute chart of EUR/USD, a Forex scalper has over a dozen opportunities of opening and closing a trade.

Similar to Forex day traders, Forex scalpers trade higher volumes to maximize the value of a pip.

It is worth noting that Forex scalping might carry a higher risk since short term spikes could result in significant losses.

Forex Position Traders

Position traders in the Forex market hold their positions open for the most extended period, averaging months.

For Forex position traders, the short-term fluctuations in the Forex market are inconsequential to them. Unlike Forex day traders and Forex scalpers, position traders base their trading on rigorous, long-term fundamental analyses such as geopolitical factors. These fundamental analyses are incorporated with long-term price action analysis to determine how a currency pair fluctuates.

By conducting rigorous geopolitical and economic analysis, Forex position traders can make an informed forecast about the demand for a currency. Let say, hypothetically, that a Forex position trader wants to trade in a currency pair involving the GBP. The most significant geopolitical factor in the UK and the primary driver of the UK’s future economy is the Brexit negotiations.

Therefore, the Forex position trader will go through the past and ongoing Brexit negotiations in an attempt to deduce how they will be concluded. If they establish that Britain will secure a favourable Brexit deal with the EU, the Forex position trader will be bullish on the GBP for the long-term. Conversely, the Forex position trader deduces that there is a slim chance for Britain to secure a favourable Brexit deal; in the long-term, they would be bearish on the GBP.

Let’s see how the long-term price action compares with the short-term fluctuations.

Forex Position Trader 1-Month GBP/USD Chart

Source: CAPEX.com WebTrader (capex.com)

If a Forex position trader went long on the GBP/USD in June 2020, their trade would still be in the money at the end of August 2020.

Daily GBP/USD Chart

Source: CAPEX.com WebTrader

From the daily chart above, you can notice that the duration between June and August 2020 had some downticks. But in the long-run, the Forex position trader is still in the money because minor daily or weekly fluctuation rarely have a significant impact on the long-term trend. Furthermore, Forex position traders have well-funded accounts and can withstand short-term drawbacks.

Forex Swing Traders

These are traders who hold their open positions from overnight to a few weeks. Similar to the Forex position traders, the Forex swing traders incorporate both the fundamental and technical analyses when making their trades. However, Forex swing traders are not in it for the long-term.

Forex swing traders are keen on identifying currency pairs, which might show short-term price momentum. Thus, they pay close attention to the daily macroeconomic indicators as well as geopolitical trends.

As the name suggests, a Forex swing trader aims to capitalize on price swings by timing their trades to capture high and low extremes. Thus, when the market shows signals of an upward swing, they go long. The swing trader goes short when the Forex market shows signs of a downtrend. They close their positions when the momentum dissipates.

Forex Swing Trader 4-Hour GBP/USD Chart

Source: CAPEX.com WebTrader

Determining the type of Forex trader you want to become is entirely dependent on your trading goals and the amount of trading capital you have. All the best!