"We have been learning about the forex markets and covered concepts such as what are traded in the forex markets and how they are different compared to other markets such as stocks and futures. We also touched upon the inter market relationships between forex stocks. Now, when it comes to actual trading, how do you do it? In this article, we explore the two main types of forex trading that you will come across on a regular basis. Whether you are searching for a ready to use trading system or trying to build your own, you will have to choose between one of the two ways of trading in the forex markets. By the end of this article, you will have an understanding of the two main ways you can trade the forex markets and also learn which is more suitable for you to trade. Depending on which method you prefer, you can expect to see how trading can be very different from one of the two types."
Did you know that with the forex markets, you can trade in many different ways? Whether you want to be a long term investor or just speculate in the markets, you can trade forex differently.
The different approaches to trading of course require you to firstly understand how you can trade. You will also need a good understanding in using the various technical indicators and how to use them.
But we will get to those aspects later. In this article we will show you the two main approaches to trading. You will learn to adapt to or use the different ways to trade based on your lifestyle.
What is swing trading?
One of the first ways you can trade forex is by something called Swing trading. For those who have no knowledge about swing trading, it might feel like as if you swing from one trade to another.
Well, in a way that is what you do. Swing trading is when you trade positions over long periods of time. For example, trades that are kept open over a few days and up to a week is known as swing trading.
This means that your trades are left open overnight (of course you will be using stop losses to prevent the risk of the trade moving against you). There are both pros and cons with this approach. But the main aspect is that swing trading is more long term. Not many traders have the appetite to keep their positions open for that long.
What is day trading?
Day trading is the concept of trading during the day. In this aspect, trades are held for shorter periods of time. Regardless of a few minutes to a few hours, traders who use this kind of strategy are known as day traders.
With day trading, you are trading in the intra-day markets. This means that you open and close the trades during the day or the regular business hours.
With day trading, as you might have noticed already, requires you to constantly focus on the markets. This is more time consuming for you as you have to be glued to your charts. There is the potential to make quick and faster profits using day trading.
But the risks are also high.
Difference between day trading and swing trading
In the previous section, we outlined the two main types of trading. But what are the difference between these two?
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Swing Trading
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Day Trading
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Swing trading allows you to trade over long periods of time. Thus, the profit potential is also high.
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Day trading is all about trading during the market hours. Profits and losses are relatively small when you day trade
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Swing trading gives you the flexibility of not having to stay glued to your trading screens
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Day trading requires you to monitor the charts all day, or set tight stop and take profit levels
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The typical take profit and stop losses with swing trading are rather high
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The take profit and stop loss levels with day trading is small
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Swing trading is mostly used among trend traders whose aim to ride the major trends in the currency markets
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Day trading takes advantage of the volatility in the markets. Thus, regardless of which way the markets are moving you can find money making opportunities
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You need to constantly monitor the positions when you are swing trading, such as adjusting the stops and moving to break even when possible.
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With day trading, traders usually use the set and forget method. Because of the tight stops, day trading allows for losses to be limited while there is chance for bigger profits to be made
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There are additional costs of financing your over night positions with swing trading. You will be charged overnight swap fees on your positions, both long and short
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The only fees you pay would be the commission or the spread. There are no overnight financing costs because you do not keep any positions open overnight
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There can be risks when the markets are illiquid, especially during early Asian trading session
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The liquidity risks are limited if you trade during periods of high volatility such as the European or the U.S. trading session
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You will be using higher chart time frames such as 4-hour and up to the weekly charts
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With day trading you will primarily trade no more than the one-hour chart time frame
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The above differences are some of the many that you can find between swing trading and day trading. As mentioned earlier, both these types of trading can be rewarding. But again, it is a matter of personal preference.
You can make money whether you are swing trading or day trading.
