How to develop a trading style

What is a trading style in CFD trading?

A trading style refers to a trader's unique approach, methodology, and set of techniques used to analyse markets, make trading decisions, and manage risk. It encapsulates a trader's preferences, temperament, and expertise, shaping how they navigate the complexities of financial markets.

In CFD trading, selecting a trading style is crucial for a trader and an integral part of a successful trading plan, as trading style forms the basis of rules in engaging with the market. Traders make significant decisions, such as when to enter and exit markets, based on their chosen style and its set of rules. The choice of trading style has also influence on profit targets, risk exposure and management approaches, and frequency of trade activity.

Finding the right trading strategy usually takes time and requires research and testing. There is no one-fits-all style because every style can generate desirable results when implemented properly. Understanding the characteristics of different trading strategies and their differences can make it easier for an individual trader to identify the best style for their trading objectives.

One way of classifying trading styles is to look how long a trader holds positions in the market. Following this approach, we can identify three popular trading styles: day, swing, and position trading. In this article, we’ll explain these trading strategies helping you to make informed decisions when choosing the right one for you.

Popular trading styles

• Scalping

Scalping involves making numerous short-term trades, aiming to profit from small price movements. Traders employing this style typically hold positions for a very brief period, sometimes just seconds or minutes. Traders employing this style thrive on capturing fleeting price movements, often holding positions for mere seconds or minutes.

• Day trading

Day trading involves buying and selling financial instruments within the same trading day. Day traders meticulously analyse market trends and indicators, seeking to capitalise on intraday price fluctuations and typically close out all positions before the market closes. By executing swift trades and adeptly managing risk, day traders strive to generate profits while avoiding overnight exposure, embracing the thrill of the markets' daily rhythm.

• Swing trading

Swing trading entails capitalising on medium-term price movements. Traders employing this style aim to capture "swings" in the market, profiting from both upward and downward trends. With the focus on capturing "swings" within broader market trends, swing traders hold positions for days or weeks, allowing ample time for market dynamics to unfold. By identifying key support and resistance levels, swing traders aim to ride the waves of market sentiment to profitable shores.

• Position trading

Position trading involves holding positions for extended periods, ranging from weeks to months or even years. Traders employing this style focus on capturing major market trends and are willing to endure temporary fluctuations to realise larger profits. With an unwavering commitment to capturing major market trends, position traders endure temporary price fluctuations with stoic patience, confident in the realisation of substantial profits over time.

Important factors to consider in trading style selection

After introducing some popular trading styles, let's look at the factors that traders should consider when choosing which style is right for them.

Risk tolerance

Assessing your risk tolerance is paramount before choosing a trading style. This involves understanding your comfort level with volatility and your ability to handle fluctuations in the market.

Each trading style carries its own level of risk, and it's essential to align your risk tolerance with the style you choose. Scalping, for example, often involves rapid-fire trades and high-frequency trading, which can expose traders to increased market volatility and require quick decision-making under pressure. On the other hand, position trading may offer more stability and lower risk but requires a longer-term perspective and tolerance for larger market swings.

Time commitment

Consider your availability and the amount of time you can dedicate to trading.

Day trading demands active monitoring of markets throughout the trading day, as positions are typically opened and closed within the same day. Traders must be prepared to devote several hours each day to analysing charts, executing trades, and managing positions. Swing trading, on the other hand, allows for more flexibility as positions are held for several days or weeks. This style may be more suitable for those with busy schedules or other commitments outside of trading.

Understanding the time commitment required for each style is crucial for ensuring consistency and success in trading.

Market knowledge

Evaluate your understanding of market dynamics, technical analysis, and fundamental factors. Different trading styles rely on various analytical methods and strategies, and it's essential to have a solid foundation of market knowledge to execute trades effectively.

Scalping, for instance, often involves rapid decision-making based on technical indicators and order flow analysis. Traders must have a deep understanding of chart patterns, price action, and market microstructure to succeed in this style. Swing trading may require a broader understanding of fundamental factors driving market trends and the ability to identify key support and resistance levels.

Assessing your level of market knowledge will help determine which trading style aligns best with your expertise and strengths.

Personality traits

Reflect on your personality traits, including patience, discipline, and emotional resilience, before choosing a trading style. Each style requires a different set of psychological attributes to succeed.

Scalping demands quick reflexes and the ability to remain calm under pressure, as traders make split-second decisions in fast-moving markets. Day trading requires discipline and focus to stick to predefined trading plans and avoid emotional reactions to market fluctuations. Swing trading may appeal to individuals with a more patient and disciplined approach, as positions are held for longer periods, requiring the ability to withstand temporary drawdowns and fluctuations in market sentiment.

Choosing a trading style that aligns with your personality traits will enhance your chances of success and longevity in the markets.

Trading styles in trending and ranging markets

In addition to acknowledging the personal preferences and objectives, traders should also consider the market conditions and their preferred trading products, when choosing the most suitable trading style.

Trending market

In a trending market, characterised by sustained price movements in one direction, traders employing trend-following trading styles capitalise on the momentum of the trend to generate profits. This market environment is ideal for trend-following strategies such as swing trading and position trading, where traders aim to ride the wave of the prevailing market movement.

• Swing trading in a trending market:
  Swing traders identify major trends and enter positions to capture medium-term price movements in the direction of the trend. They utilise technical indicators and chart patterns to identify entry and exit points, aiming to ride the momentum of the trend for several days or weeks.
• Position trading in a trending market:
  Position traders take a longer-term perspective, holding positions for extended periods to capture the full extent of major market trends. They focus on fundamental analysis and macroeconomic trends to identify significant market themes and structural shifts, allowing them to ride the trend for weeks, months, or even years.

In a trending market, traders benefit from the clarity and direction provided by the prevailing trend, allowing them to confidently enter positions in alignment with the market momentum.

Ranging market

In a ranging or sideways market, where prices move within a defined range with no clear trend, traders must exercise patience and discipline to navigate the choppy price action. This market environment is favourable for countertrend trading styles, where traders seek to capitalise on reversals or bounces from support and resistance levels.

• Scalping in a ranging market:
  Scalpers thrive in ranging markets, where they can exploit short-term price movements within the range. They use technical analysis and order flow analysis to enter and exit trades quickly, buying at support levels and selling at resistance levels within the range.
• Day trading in a ranging market:
  Day traders adjust their approach in a ranging market, focusing on intraday price fluctuations and trading opportunities within the range. They use technical indicators and chart patterns to identify short-term trends or reversals, executing trades with precision and discipline.

In a ranging market, traders must effectively adapt their strategies to exploit short-term price fluctuations within the range. By adapting their strategies, traders can capitalise on trading opportunities even in the absence of a clear trend.

In conclusion, developing a trading style involves understanding your approach, preferences, and expertise in CFD trading. Before choosing a style, consider factors like risk tolerance, time commitment, market knowledge, and personality traits. Adapt your style to suit trending or ranging markets. By honing your skills and remaining disciplined, you can embark on a journey towards trading success.