Discover your Trading Style: Pros and Cons

Being thoroughly informed about the risks and benefits of a particular trading strategy is paramount if you intend to participate in the markets with the best possible risk-to-reward ratio, not only in terms of money management but also in terms of a greater confidence and the handling of potential stress factors. In the present article, we are going to examine in further detail all the positive as well as negative aspects of the three main trading styles. You will find below all the elements involved in each of the previously described time-related trading methods, which will help you identify and decide which one is the most suitable for you, according to your time availability and personal conditions.

SCALPING AND DAY TRADING (SHORT-TERM)

Positive aspects

• As the profit targets are quite limited, the risks per trade are also very small.
• The high frequency of the trades opened and closed in one day, allow you to compound the profits more often thus increasing the total returns.
• There is the opportunity to make money every day and much faster.
• This is an extremely active style and it allows you to be “always in the market”.
• As all the trades are usually closed at the end of the day, there is no need to worry about eventual negative roll-over interest.
• At the same time, closing positions every day protect you from the risks of sudden market moves, especially during week-ends.

Negative aspects

• The greater amount of transactions imply that you will be paying more spread, this will have an incidence on global returns over time.
• The counterpart of being able to make money in a short time span is that you can also lose money faster.
• Because of the speed at which those trades usually develop, it is quite hard to learn and master and needs complete attention.
• This trading style will absorb a great deal of your time, as you have to be monitoring the trades throughout the day. This would make it incompatible with other activities, as for example having a full-day job.
• Although it could be a positive trait for some traders, the emotional “rush” caused by such a high-paced activity could become addictive, and even degenerate in gambling attitudes.
• Day trading and more specifically scalping need a constant and swift state of alert and concentration, which in turn can build up much stress upon the trader.
• The high amount of trades performed in very short periods of time increase the potential for substantial consecutive losses; for this reason, day trading and scalping are the riskier choices.
• You will need to pay much more attention and respect the rules of your strategy, with greater discipline, and a thorough analysis of risk to reward ratios along with a tight money management plan. Small errors that would have little incidence on higher time frames can lead to extreme losses on day trading.
• Because of the usual randomness of short time spans, predicting the overall trend of the market can be much more difficult.
• For all of the above, day trading and scalping have a much lower success rate than longer term trading styles.

SWING TRADING (MEDIUM TERM)

Positive aspects

• Profit targets and stop-losses are clearly defined and managed.
• Spread costs become much less important on overall profit/loss results, as there will be much fewer trades.
• You do not need as much time as in day trading, this implies you can perfectly trade and have a normal day job simultaneously. You can leave the trades unattended as they will be managed with proper stop-losses and target limit orders, which can barely require as little as one or two hours a day.
• Because of the above, this method is much less stressful for the trader, mentally as well as physically.
• This trading style usually shows a higher rate of success compared to day trading, as it is much easier to learn and manage.

Negative aspects

• Becoming profitable can take a little more time, as the trades usually last over longer periods. Also, you will have to take into account the costs of negative roll-over on some positions.
• Despite the fact that the time needed to place trades is shorter, you still need to plan and analyze the markets daily, and keep your positions under supervision. It is not a “set-and-forget” approach.
• There is a risk to become biased and attached to the trades, which will cloud the mind and make the exit decisions more difficult.
• You still need to exert constant discipline and follow the rules of your system, and also manage your emotions accordingly. Much patience is needed to wait for the appropriate moment to exit a position and not fall prey of sudden impulses. Decision-making is tougher and many mistakes are made while evaluating apparent changes in direction that in the end prove themselves to be fake moves. Emotional stability is needed to accept those errors and start over.

POSITION TRADING (LONG TERM)

Positive aspects

• Long term trading absorbs most small mistakes as the overall moves are wider and thus profits are greater. Risk-to-reward ratio is usually much lower.- It is the most easy way to trade, and profitability has a higher rate than on shorter term methods.
• There is very little stress involved, as positions do not need to be monitored as often.
• The market is easier to analyze and predict the main direction, as trends on higher time frames are more stable. Market noise should have no effect on your decisions.
• This style needs very little time thus you can easily share other activities and work while also keeping an eye on the markets.

Negative aspects

• You can’t benefit as much from the power of compounding, as profits aren’t realized as often compared to intraday or even swing trading.
• Roll-over interest on the negative side can become huge because trades are held during a long time.
• The risks implied by holding positions overnight and over the week-end increase as there could be dramatic changes in the market which could cause significant drawdowns.
• Your equity is not available for a long while, this being an obstacle to make further entries should they appear. You will need to wait longer, or even might need to realize positions at a loss in order to recover enough available margin.
• You might be tempted to allow positions to stagnate in the negative while waiting for a turning back of the original trend, and sometimes be unable to gauge if there has indeed been a reversal. As in swing trading, you can become so much attached to your positions that you overlook those drawdowns and this can have a very bad influence on your psychological state as well as on your final returns.