Trading Style - How to Execute a Trade
So now that you have some charts and indicators, it's almost time to learn how to actually execute a trade.
But before we go into that, you need to determine what your trading style is. Every trader is different. If you choose a strategy that doesn't suit your individual personality, you won't do as well as you would otherwise.
But if you know what kind of trader you are, you can tailor the suite of trading tools to fit your individual needs, and will therefore have more success as a trader.
Types of Trading Styles
A position trader is someone who holds trading positions for weeks or months.
Position traders love fundamental analysis. They pay a lot of attention to such things as unemployment levels, trade deficits, and inflation.
For this reason, when they do use technical analysis, they focus on monthly, weekly, and daily charts and tend to ignore price-action on smaller time-frames.
If you came to trading from having been a long-term investor in the past or from having an interest in economics or politics, position trading might be for you.
Position trading may also be for you if you have a very busy life and relatively little time to trade.
A swing trader is someone who holds positions over a few days and usually for no longer than a week.
Swing traders like to review their charts over the weekend and find opportunities that may arise during the week.
They rely on forex calendars to tell them what major news events are going to occur during the week.
Is there an employment report coming out on Friday? Is there GDP data coming out in the middle of the week? Is a prominent central banker about to give a speech?
Once a swing trader gets a plan of action, he or she checks on the charts throughout the week to see if the trading opportunities discovered earlier have come to fruition.
If so, the trader enters the trade. But regardless of how it turns out, a swing trader likes to exit trades before the weekend so as to avoid the volatility that often occurs at the start of the trading week.
If you are interested in macroeconomic and political news but don't have the patience for position trading, swing trading may be for you.
Swing trading is also useful if you don't have a lot of time to trade because it generally takes less time than day trading or scalping.
A day trader is someone who likes to open and exit trades during the work-day, closing them before his or her country's market closes.
Over the long-run, day-trading can provide tremendous profits to someone who is skilled at it. However, it also requires a lot of commitment in terms of time.
Because of this time requirement, it's often useful for people who are retired or who want to pursue a career in trading.
Day traders focus heavily upon technical analysis and usually don't pay much attention to long-term macroeconomic forces.
Although they do pay attention to the news on days when it is relevant, this is less of a factor than it is for swing traders.
If you really like technical analysis and don't want to spend much time looking at long-term political or economic developments in the world, day trading may be for you.
A scalper is someone who doesn't want to hold a trade for more than a few minutes.
Scalpers generally place very narrow stops and take-profit points. As a result, they make very little money per trade.
But because they make so many trades over the course of a day, a skilled scalper can sometimes make as much money or more than a day-trader.
Scalping requires a major time commitment and a deep knowledge of technical analysis. It also requires intense concentration.
If you're the kind of person who wants to know right now how his or her trade is going to turn out, scalping might be the right style for you.
So now that you've decided on which trading style to adopt, how do you actually execute a trade? For that, you need to understand the differences between order types.
The easiest way to execute a trade is to use a “market order”.
In most brokerage platforms, you can do this by clicking a button that says “buy by market” or “sell by market”.
A market order simply tells the computer to buy or sell at the current market price.
It doesn't get simpler than that.
Limit Entry Order
If you want to wait until the price gets lower before buying or gets higher before selling, you can instruct the computer to “buy limit” or “sell limit”.
In this case, the computer will wait until the price gets to the designated level before buying or selling.
It's important not to confuse this with a stop-entry order, which is explained below.
While limit-entry orders are intended for cases where you want to buy at a lower price or sell at a higher price, stop-entry orders are reserved for the opposite situation.
You enter a stop-entry order if you want to buy at a higher price or sell at a lower price.
Setting Stop-Loss and Take Profit
Now that you know what order type to use, the next step is to determine a stop-loss and take profit point.
Most brokerage platforms allow you to do this directly on the “new order” screen. But depending on your trading style, you may want to place the order first and then edit it afterwards to add in stop-loss and take-profits.
A stop-loss is an order that tells the computer to automatically exit the trade when it turns against you. Stop-losses are a very important part of risk management.
Most successful traders do not enter a trade without having a stop-loss in place.
To find the best place for your stop-loss, ask yourself “what price would prove me wrong?”
For example, let's say that the price is trading within a range between 1.04 and 1.08. And let's say that the price has just fallen to 1.05. So your plan is to buy right now and then sell when it hits 1.07 (just in case it doesn't make it all the way to the top of the range).
In this case, you may want to place your stop at 1.02 because if the price falls that far, it means the range has been broken.
Another thing to keep in mind with stop-losses is the kind of market you are trading in.
If you're trading in a market that is trending in one direction, you want to place fairly wide stops.
This is because trending markets have a lot of volatility. And if you place your stop too close to your entry point in a volatile market, you could get stopped out and then have the price shoot up in the direction you wanted it to after you've already exit the trade. This can be very frustrating.
On the other hand, you want tighter stops in range-bound markets. This is because you want to protect yourself in case the range breaks.
And there's less of a chance of getting whipsawed because a break below the bottom of the range usually means the price is not going back to its previous level for a long time.
Getting into a trade and watching it run can be lots of fun if it's going in your favor.
But at some point, you need to take profits. Otherwise, the market will eventually turn against you and wipe out all of the gains that you've made.
In order to make sure that you bag all the cash you can from a winning trade, you can set up the computer to automatically exit the trade once a certain price goal is reached.
- If you're trading a range-bound market, you can set your take-profit for the top of the range.
- If you're trading a trend, look for important areas of resistance or support and set your take-profit point there.
Another option is to use a “trailing stop”.
This means that as the price moves in your favor, you drag your stop-loss further and further in the direction the price is moving. Eventually, the price reverses and stops you out.
But by that time, you've already made a profit. In such a case, you don't need to set a take-profit point.
Now that you know how to make trades, it's time to delve into the two most important topics in forex trading: risk management and trading psychology.