How do you Trade? The 3 Different Trading Styles

LONDON, January 17, 2012 /PRNewswire/ --

Every trader has their own strategy when it comes to spread betting or CFD trading, but there are three distinct categories of trader, which include day traders, position traders and swing traders. Spread betting provider City Index explains the differences between the three forms of trading.

While there are a variety of markets to trade from indices, shares, currencies, metals and commodities to bonds, interest rates, sectors and options, these can also be traded in a variety of ways as part of a trading strategy.

Over time, traders will develop their own unique trading strategies in order to capitalise on the movement trends of their chosen markets.

Some markets may fluctuate regularly, encouraging short term trading, like day trading. Meanwhile other markets may move more gradually, which encourages more patient buy and hold strategies as part of position trading.

Here we explain how each form of trading works and highlight the differences as well as the pros and cons.

Day Traders

Traders who enter and exit positions within the same trading day are known as day traders. They rarely, if ever, hold spread betting positions overnight. Instead trades are opened and closed within a few seconds or minutes as they make many small trades in a very short space of time.

Due to the immediacy of these trades, day traders tend to focus on tight spreads and markets with plenty of movement. However, spread betting in this way can be time consuming and requires close market analysis to select appropriate stocks and positions.

While day trading presents an exciting potential to gain profits in a heartbeat, there is a greater element of risk involved. While day traders will have smaller profit targets and a smaller risk per trade as a result, overall traders can lose a substantial amount of money in a very short period of time because the market is difficult to predict in such a short space of time. Longer term trends in the market can often be easier to see than extreme short term ones.

Discipline, proper planning, risk management and concentration is incredibly important due to the fast paced nature of day trading. It is also time consuming, which is why it can be very difficult to trade properly if you have a full-time job.

Position Traders

The majority of traders are position traders who will buy shares or place spread bets for the long term. Positions can be kept open for days, weeks or months on end as short-term fluctuations in the market are ignored in favour of hoping for a significant profit over a longer period.

This style of spread betting relies on the trader understanding the long term fundamental trends of a stock, often using charting to help speculate on the market's eventual direction.

This makes position trading less stressful than day trading and more forgiving as small mistakes are more easily absorbed in market movement and the size of your eventual profit.

However, because positions can be highly leveraged and trades remain open for extended periods of time, traders often let their losses run in the hope that the market will turn around and start trending back in the desired direction. There is also a risk in keeping positions open over night due to market gapping.

This is why it is always important to have a proper plan in place which uses closing orders to limit your losses and cash out your profits at predetermined values. Guaranteed stop loss orders can also be used to protect against market gapping for an additional fee.

Swing Traders

While day traders and position traders represent opposite ends of the spread betting spectrum, swing traders sit somewhere in the middle.

Swing traders look for opportunities to profit from significant market movements in a short space of time by watching for stocks with the potential for trend reversals or retracements (a temporary reversal in the direction of a stock's price that goes against the prevailing trend).

Swing trading is typically a short to intermediate term trend following system lasting anywhere from a couple of days to a couple of weeks and are often created using orders that use trend reversals and retracements for their entry/exit points in the market.

In many ways swing trading is the most opportunistic form of trading, but while it requires less time than day trading, preparation, planning and ongoing market analysis is one of the most important tasks to ensure profits are gained from market reversals or retracements.

As a result, discipline and good trading psychology is equally important, as it is not uncommon to exit on a retrace or trend change only to have the market immediately change back and head in the original direction.

Each form of trading has its own level of profit, risk and involvement required. But with all types of trading, discipline, self control, strategy and risk management tools are essential additions to any trader's arsenal when speculating on market movements.

Learn more about financial spread betting and CFD trading with the free online education tools and free seminars at: http://www.cityindex.co.uk/learn-to-trade/

Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

About City Index:

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index Trading Platform.

As a group, we transact in excess of 1.5 million trades every month in over 50 countries. We provide access to a wide range of instruments including margined foreign exchange, CFDs and, in the UK, spread betting.