6 Forex Trader Types You Need To Know About: Uncover Your Tribe!

image of the six numbers that describe the six forex trader types

The six distinctive forex trader types you need to know about when trading the forex market. Forex marketplace being the largest, the most liquid and the most leveraged financial Market is the place where forex trader types from all walks of life meet and compete with each other on a daily basis.

These speculators/traders utilize various trading strategies, all trying to predict the outcome of their bets. Employing different types of software along with using proprietary trading techniques, became the norm of their trading lives.

 

What are the different types of traders

Truth be told, there are six different types of traders, and each requires a unique speculative process. It doesn’t matter if you prefer to trade for the income or for the capital growth purposes, choosing the right trading style will definitely improve your chance of success.

However, first you need to know about these forex trader types to actually associate yourself with either one of them.

Day-trader

Day traders are buying or selling the financial instrument on the same day. Meaning, they will not hold their open trades overnight, when markets are closed. Their holding period varies from minutes, up to hours, but the closing has to happen within the very same day.

Day trading profits are closely related, or should I say, affected by the bid/ask spreads. The tighter  the spreads are, the more successful is the trade, because every price increment that goes is in your favor, contributes to the overall positive outcome.

Second in line is the broker’s commission structure that also affects the bottom line.

The lower the expenses, the more profitable are the trades.

Day traders are often portrayed as a group of traders that makes lots of money very quickly.

They are sort of “Trading Gods” of the Industry. That is very far from being the truth…

Imagine, sometimes you have to make several trades during the day just to break even. It is a very intense trading approach that requires lots of screen time and is very energy consuming.

Hence, the day-traders may endure several financial losses in the beginning of their career, which  often affects their mental state in a very destructive way. That is why, if you decide to start from this approach, you may never even reach a profitable stage.

Also, most of the day trading involves the use of leverage (borrowing money from a broker) to increase the returns. Because of that, day traders have to have an enormous discipline to hold up against the sudden market moves that may result in larger than expected losses.

 

Check out common Day-trading Mistakes:

 

Scalper

Scalpers are “scavengers” of the trading world. They make tiny profits repeatedly from the smallest market moves. Traders that use this type of market approach usually implement various short term strategies where the trades could last minutes and even seconds.

Basically, you are trying to capitalize on smallest price fluctuations, going long (buying) or going short (selling) one or multiple financial instruments simultaneously.

Scalpers may put anywhere from a few to multitude of dozen trades in the same day. Since they are opening and closing their trades before the market close, they are also considered to be in the “Day-trading” category.

Now, scalping is even more stressful than the day-trading, because whatever you’re required to have as a day-trader, on top of that, you’re also required to be very skilled in recognizing rapid momentum changes.

Both scalpers and day-traders are known to be an Intra-day speculator. Bottom line, scalping is the next level of the Day-Trading field, because it requires quick-thinking, lightning reaction, an enormous concentration.

 

Algo Trader or “The Quant”

Algo-trading, also known as the Quantitative trading requires the use of sophisticated computer programs that place trades within milliseconds, that is a thousandth of a second, to profit in the Financial markets.

The term is additionally used to describe the High Frequency Trading (HFT). Although, it is a part of the Algorithmic trading, the HFT’s completely rely on non-human interaction. While the Quants, on the other hand, may use semi-algorithmic approach to trade the markets.

As the name implies, algo-trading is for the people who are OK with making use of technology, and allow machines to take over their trading.

The Quants are data driven individuals and usually are the math geeks, or have an engineering background. These types of traders are very logical, looking for ways to minimize the emotional impact in trading.

 

Position Trader (Macro Trader)

Position trader also referred to as a Macro trader is a long-term market player. Why – Macro? Because, these speculators are driven by the local or the Global Macro Economic events. Mostly these types of traders are Trend originators and Trend followers. Meaning, they have the means and the resources to create long-lasting trends.

In general, they fall into the group known as “The Big-Boys.” Position traders hold their open trades for weeks to months, sometimes even years. Hence, they are not affected by the Intra-day volatility – the sudden market moves.

They have long-term Investment horizons than your average market participant. Because of that, they are able to achieve smoother profit curves, but at the same time, they have smaller overall returns over the aggressive trader types.

 

Swing Trader (Medium-Term Trader)

Swing trading is a style of trading that is geared towards capturing smaller trends, as opposed to the position traders. Their holding period could last for a day, and up to a week. These types of traders are not keen on fundamentals.

They are rigorous practitioners of Technical analysis, and mostly use patterns in their decision-making. Basically, they use technical analysis tools to help them formulate trading ideas.

Given that their holding period is much shorter that of position speculators and much longer that of Intra-day traders, I may say, this is the perfect style for the people that want to be more active in the markets, but at the same time don’t want to be involved in day-to-day speculative craziness.

 

News Trader, Volatility-Trader (Micro Trader)

News trader, also known as an event-driven trader prefers to fully take advantage of economic news releases that directly affect the currency prices. These types of speculators know exactly what news events or political developments are in correlation to drive the currencies directionally.

Usually, these traders are in and out of their positions when a particular news event or a certain political situation is being played out. However, they might hold their open trades much longer, if the event is in alignment with the position. Hence, some of the short-term news trades might become swing trades, or even transform into the long-term speculations.

Just to name the few events: Employment figures, Retail sales, Consumer Price Index, Manufacturing numbers, Elections, etc. One thing to mention, for this type of trading you’ve got to have a reliable and a very high-speed  news source, because in this case, every second counts!

 

Also, check: How Knowing About The Stop Hunting Forex Can Make You A Better Trader

What is the best method to trade forex

Honestly, there is no definitive answer to this question, and here is why… What works for one trader doesn’t mean it will work for the other. It is up to the trader to determine his or her trading style based on their own psychological profile.

Some people prefer Intra-day trading because it suits their profile. They are naturally good under pressure, they are quick on their feet, and they adapt to market speed very naturally. Others prefer slower speeds, they are more analytical type, need more time to process information, need more time to “put all their ducks in a row.”

One of the key factors to consider is the time-period of your trading style. This all means that you need work from your end, first. You need to consider your personality and find the method that will fit, as the glove fits the hand, your profile – a perfect match.

Gladly, there are thousands of trading strategies to choose from, meaning you don’t have to come up with the unique one. The road has been paved for us by the traders that came before us, so all you have to do is do some poking and find the one that fits. Mainly though, all these strategies stem from one of the three trading approaches described below:

Trend-Following Trading

Trend following is the simplest and the most popular way of speculating in the markets. It implies following the dominant market tendency; buying the financial instrument when it breaks through a major supply area in the up-trending conditions, and selling a major demand zone in the down-trending conditions.

In a nutshell, you simply follow the dominant trends when they have been already established for some time, and not when they are in a development stage.

This can be possible when we have strong and prolonged trending conditions fueled by the Government (Fiscal & Monetary politics) or by the Central Bank Interventions (Rate adjustments, changes in currency Supply/Demand levels).

Trend following speculators, usually are the long-term traders because they have to stay with the trend for a long time. However, “simply” doesn’t mean easy!

For the trend-followers, increase in Volatility is the most devastating market occurrence. Imagine staying with the trend for several months, and enduring several market corrections against the dominant trend.

When markets are volatile, it becomes harder to believe in, and stay longer with the Trends. It takes a special mindset and an enormous amount of discipline to overcome these hurdles.

 

Counter-Trend Trading

Counter-trend methods, on the other hand, are trying to capitalize on the very same Volatility.

As the name implies, you are trading against the dominant tendency, catching these volatile corrections.

Counter-trend trading depends on the statistical fact that price breakouts do not always evolve into mature Trends.

Hence, a trader that uses this market approach, in essence, is trying to capitalize on the market retrace from the historic highs or lows. Usually, the counter-trend speculator will look for the major historic point of reference, to lean against it, in a hope of price bouncing from the level.

These traders commonly use support/resistance and supply/demand levels in their market analysis. Keeping up with economic releases is also very popular among counter-trend traders, as they are a great source of the above mentioned Volatility. Volatile market environment, offers an ideal situation to profit from the market swings.

For example, if the market has been trending for a prolonged time, then when the volatility picks up at the highs or the lows of the move it can lead to a “panic selling” in the up-trends, and a panic closing of short positions (corrective up-swings) in the down-trends.

Therefore, monitoring the market phases to catch that momentum shift, for the counter-trend trader is more crucial than for the other market players.

 

Market-Neutral Trading

The Market-neutral approach is geared towards avoiding some form of Market risk. This is done either by hedging the risk with other financial instrument in a different sector, or involves hedging the underlying financial contract with the use of common derivatives: options, forwards, swaps etc.

Market-neutral trading involves profiting from the market while it goes through different conditions. Whether the market goes up, goes down, goes sideways, the market-neutral strategies are geared towards either to offset the risk or even able to deliver positive returns.

For example, in Forex, you might be buying the British pound vs the US Dollar (GBP/USD) months before the Brexit, knowing that the closer you get to the vote, the more volatility will be expected. It might even be increased tenfold.

Hence, you hedge your exposure in the Options market by purchasing the put options contracts for the British pound to mitigate your risk.

The Market-neutral approach is also known as the Delta-neutral trading, where you’re trying to eliminate directional risk. Delta in financial markets represents direction, hence delta-neutral strategies, in essence, are directionless strategies.

You don’t care which way the market swings, either way, you make positive returns.

The logic behind it is this, you have to find two or more, positively correlated or negatively correlated trading instruments. For example, in the spot Forex market, we have positively correlated EUR/USD & GBP/USD trading instruments. The correlation is not 100%, but it gets very close, in certain market conditions.

Especially, during the major European-economic announcements. In such moments, delta-neutral traders will buy the EUR/USD pair and sell the GBP/USD pair, hoping that the win on one pair will offset the loss of the other, at some point in time. They are eliminating the directional risk, as they do not want to care which way the market swings after the actual vote.

Yes, you’re going to have a negative balance on one pair, and a positive return on the other.

The whole trick is, during a certain moment in time these two open trades will generate a positive balance in total. Once this happens, a trader needs to close both trades simultaneously to book the positive return.

Usually, this is done by the Algorithmic software, because this can happen very quickly, literally in seconds, for the humans to process and react. Now, for the negatively correlated pairs such as the USD/CAD & the CAD/JPY, better yet the EUR/USD versus the USD/CHF you simply buy both or sell both of the instruments. This type of trading is the form of statistical arbitrage.

The bottom line, the expression “delta-neutral” relates to a strategic trading method which intends to reduce directional exposure for hedging purposes or for capitalizing on increased volatility.

Here is the video explaining this concept in detail, whatever goes for the Stocks/Indices can be applied to the Currencies:

 

 

Here is the Inter-market Correlation Matrix:

image of a correlation matrix in relation to forex trader types

 

 

How to Find Your Trading Approach

Well, to answer this question we would need to go to the basics of finding anything in our lives.

We would need to try different trading approaches, test numerous trading strategies, then get the feedback by answering the following basic questions:

What are my trading goals?

(Am I doing this for a part-time cash flow, for an Income substitute or just want to build Wealth year, after year…)

What is my time availability?

(Can I trade the European or the US session… maybe both…)

How do I feel about trading the long-term/short-term charts?

(Are long-term charts too slow for me…)

(How about the shorter time-frame speed, does it affect my mind…)

Is Technical trading, all that I need?

(                                       )

Am I better at trading with indicators?

(                                       )

You may fill in the blanks for yourself.

The list could go on, and on… and on…

These are the types of questions you’ll want to ask yourself to find out of what you really like, stay with it, and make it work.

I mean, there are hundreds of questions we can ask ourselves to narrow down the trading approach that will fit our personality, will fit our availability and will fit our ability.

I can’t emphasize enough, if the trading approach doesn’t feel natural, doesn’t feel right for you, then most probably it is not going to work!

You basically have to keep searching and testing until you find something that fits you.

And yes, it may take years and years of trials and errors before you crystallize into a successful trader. This is the main reason why Trading takes such a long time to master.

It is amazing, how people just jump into speculating without knowing their psychological profile, without proper education and without a substantial amount of screen time.

If something doesn’t work for you, how do you tackle the problem? Maybe you need to do some back testing of your trading strategy. You’ll be surprised to find out the things that need just few little tweaks, to become finally profitable.

Maybe you need to change the trading time frame, or trade specific forex sessions.

Maybe, consider adopting new methods. Choose two, maximum three and do some serious back testing. After you’ve narrowed, do forward testing in real time (about 30 trades max.), to see how the method is holding up in a real trading environment.

I know lots of traders that have adopted a trading style just on the basis of profitability. Heck, even I went through the same experience. Meaning, they have stuck with the method for so long, trying to make it work just because it has produced spectacular results for the other traders. Little did they know, it never matched their “trading spirit.”

Also, read: BUSTING THE MYTH OF A FOREX MARKET MAKER

Conclusion

The Forex marketplace is the home to many trading approaches and various trading styles. However, when looking at it with the “bird’s eye view,” these trading approaches & trading strategies mainly fall into most prevalent categories: short-term trader, medium-term trader, long-term market player.

Furthermore, all these categories with all their methods and their strategies stem from the three basic market approaches: Trend-trading, Counter-trend trading, and the Market-neutral speculations.

Choosing the right trading approach, then accordingly, the right trading style that fits your psychological profile is even more crucial to the aspiring forex speculator than, just choosing the right trading time-frame or the right trading instrument.

There is a number of  unique elements within these classified groups that could contribute to one’s bottom line success. Each and every speculator will have to consider some of these crucial fundamental factors that impact trading on a personal level.

How To Use The MACD Indicator MT4 Like A Pro

image of the macd indicator mt4

The MACD indicator mt4 is the most popular and the most widely used among technical indicators. However, not many traders realize that the indicator is considered to be a derivative of an indicator. It uses an Exponential Moving Averages in its calculation.

Meaning, it derives the values from the indicator, the moving average indicator to give readings to a trader.

Learning to use the short-term momentum to your advantage could be a daunting task. And, it  could get significantly more challenging when one is uninformed of the right tools that actually can help.

The article below will dissect “MACD indicator for mt4” this notoriously popular indicator and highlight its most widely known implementations!

The History

Gerald Appel introduced the MACD in the 1970s, and since then, it became one of the most popular indicators used by traders all around the world.

The actual function of this technical tool is to discover trend direction.

At the same time, it is also used in evaluating momentum and spotting possible reversal points.

The tool can work extremely well in conjunction with other indicators, but it was proven by time to be powerful enough as a standalone strategy.

The reason the MACD indicator is so popular, because it combines together trend and momentum in one technical tool. This unique indicator can be successfully applied to longer term charts; Daily, Weekly, Monthly, as well as to shorter time-frames.

Making Sense of the MACD Indicator

The MACD indicator mt4 is commonly inserted underneath the trading chart, in a separate window. The Moving Average Convergence Divergence is a fairly simple to use technical tool.

Nevertheless, it would make much more sense to fully understand it before trying to trade its signals. So, let’s bring a closer look at the design of the MACD indicator, together with its default settings.

image of the macd indicator mt4 platform

 

What are the two lines in MACD – (The MACD Indicator Structure)

As we have mentioned before, the MACD is a fairly simple indicator that uses three basic components to generate trading signals.

Let’s now highlight each of these separately:

#1) The MACD Line

The MACD line is the fastest line on the indicator. Since it is inherently more sensitive it reacts faster and generally moves above/below the second line.

 #2) The MACD Signal Line

The second line is called the MACD signal line. It is given such name, because it produces the most common MACD signals. Given the fact that this line is slower, it gets frequently crossed by the above mentioned, and “inherently faster” MACD Line.

#3) The MACD Histogram

The histogram is merely a pictorial representation of the difference between the MACD line and the signal line. Basically, it calculates the difference between the MACD line and the Signal line displaying it in a histogram format. Now, the MACD histogram was added to the indicator later on – sixteen years later, to be exact. It was modified by professional trader & analyst Thomas Aspray in 1986.

Here is the classic version of this tool, described above:image of the macd indicator mt4

 

 

And like the MACD itself, the Histogram is also considered to be an oscillator, because it fluctuates below and above the zero line.

The reason Aspray modified the MACD indicator by adding the Histogram, is to anticipate the signal line crossovers.

The key word here is to anticipate! The bigger is the gap between the lines, the higher are the bars of the MACD histogram and vice versa.

 

How do I set up MACD indicator?

The default MACD parameters are 12-26-9. These are the original and the most common settings for the majority of trading platforms. Let’s interpret these numbers and find out how they interact with the fabric of the indicator.

As I’ve mentioned earlier, the MACD is an indicator of an indicator. It uses the difference of the 12 and the 26 Exponential Moving Averages of a given security. The indicator calculates a 12 period EMA, then subtracts a 26 period EMA from it. Finally, it plots the result in a form of the MACD Line – the faster line. Basically, the MACD Line is the difference between the above mentioned 12 & 26 Exponential Moving Averages.

The number 9 is the Signal Line. It is a product of the 9 period Exponential Moving Average that is plotted on the MACD Line. Actually, this is the reason why the Signal Line is slower than the MACD Line, because of this smoothing factor.

Traders have an option to optimize the default parameters by changing the indicator settings from the menu. For example, if you are looking for more sensitive readings on Weekly & Monthly charts, you may want to try the 5-35-5, or the 5-15-5 settings. Alternatively, if you are trying to reduce the whipsaw action, the frequent signal line crossovers on the shorter time-frames, you may choose to lengthen the variables.

What settings to use is totally up to traders’ discretion. There are no right or wrong MACD parameters, however, sticking with the default settings and using the indicator as it was meant by the designer, on the longer time-frames, is certainly advisable.

Also check:
How Knowing About The Stop Hunting Forex Can Make You A Better Trader.

Trading with the MACD Indicator  (The Signals)

Despite the fact that the MACD is a simple indicator, nevertheless it can produce a myriad of trading signals. In this article we’re going to look at the most common ones.

The Zero Line Crossovers (Up or Down)

The MACD zero line crossing over happens when both the MACD line and the Signal line crosses above/below the zero point on the chart. In most cases this type of behavior occurs in strong trending conditions. Meaning, the zero line crossover happens after the trend has been reversed.

In such cases, the MACD line and the Signal line, both are pointing upwards or downwards with good separation between them. In addition, the MACD histogram is either steadily rising or declining without any indication of momentum slowing down.

This happens, mostly when the trending conditions have been in full throttle for quite some time.

The Signal Line Crossovers (Up or Down)

This is probably the easiest way to use the MACD indicator as it requires simply watching the MACD line as it goes above the Signal line for going long (buying), and going short (selling) when the MACD line goes below the Signal line. Now, I have to warn you, this method produces the most trading signals! Therefore, it also generates a myriad of false entries.

Thus, the chances of getting into a bad trade, when solely relied on this signal, are very high. Many speculators are using the MACD indicator mt4 in conjunction with other technical indicators such as; Stochastic, Relative Strength Index and other oscillators, along with pure price action techniques to confirm these type of signals.

Bullish & Bearish Divergences

Divergence takes place when the price action and the MACD indicator do not agree on the direction. This happens when the indicator is not moving in tandem with the price action, hence the term divergence. Bottom line, the price and the MACD are diverging from each other.

This can be interpreted as an indication that momentum is slowing down with the possibility of a complete market reversal.

It could be indicating the end of the existing bullish or bearish run and the start of a new directional move in the opposite direction. Traders will simply look to catch that reversal of the existing trend, especially when the trading instrument is being over extended for several weeks.

How Do you trade with MACD – (General Concept)

There are two primary uses for the indicator, each offering its advantages and disadvantages.

Basically, you either use it in trending or in non-trending conditions. Knowing how to apply the indicator in different market environments will certainly help to reduce some of the loosing signals.

Using MACD in Trending Conditions:

Using MACD in Ranging,  Non-Trending Conditions:

Honestly, I advise NOT to use the MACD indicator in range-bound conditions!

It is not an effective tool when the Markets are flat… It is a Momentum as well as a Trending indicator. On the other hand, everything depends on the range itself. For example, if we have a wide (200 – 400 pips) range, then by all means, you may use it.

However, if we have a tighter (100 – 200 pips) range, then you should be asking yourself the following question: “Does it make sense, if I apply the MACD indicator for such environment?”

More often than, not you will be whipsawed in tight ranges, and that is a fact. Lets not forget, the MACD indicator was primarily designed for trading stocks. This implies, it had to be used on longer time-frames so, using this technical tool on shorter (30-15-5 minutes) time-periods is not advisable.

The best use of MACD Indicator:

How do you use MACD in forex trading?

The clear trend changing signals help minimize subjectivity from the decision-making process.

The Signal Line crossovers make it easy for speculators to confirm that they are participating in the right directional momentum.

In the event, when the MACD Line and the Signal line, both appear above the zero level, pointing upwards, it suggests a strong up-trending condition. The same is true in reverse scenario; below the zero level and both pointing downwards – strong down-trending environment. Some traders use the

Signal Line crossovers to initiate their trades and Zero Line crossovers to confirm the initial trading bias. As stated before, because the MACD uses moving averages in its calculation, it often lags the price action.

Meaning, the Signal Line crossovers can appear late, and if a trader acts solely on these crossovers, it will affect his or her bottom line. In most cases, the losing trade signals appear in non-trending range bound conditions, when the crossovers occur pretty often in a brutal whipsaw manner.

Bullish or bearish divergences in the MACD Histogram can give traders an early heads up to a possible Signal Line crossover. Also, divergence usually forms when trading momentum is slowing down, however, it doesn’t mean that a reversal is imminent.

Therefore, studying the price action and determining the correct Market environment will help in deciding which trading signals to take.

Check out other article: Is Part Time Trading Worth Its While?

MACD indicator mt4 weaknesses

The biggest downside of this technical tool and any other tool, for this matter, is that it uses price derivative in its calculations. Hence, it is unable to react to volatility increase. Remember, the MACD Line is calculated using the difference between the two (12-26) moving averages.

During the sudden or sharp moves (increased volatility) a trader can get whipsawed out of a winning position before catching that momentum change. The lagging nature of this technical tool can generate many trading signals that may cause break-even situations, or cause losses even during the strongest trending conditions.

Another thing, the MACD is not very good at identifying oversold/overbought market conditions. Since the indicator doesn’t have the upper and lower boundaries, in strong trending conditions, it can and most certainly will go beyond the historical oversold/overbought extreme levels.

In Summary

The MACD indicator is considered to be the most popular technical tool by Fx traders from all walks of life. It simply gives traders the ability to quickly spot the short-term momentum changes in trends.

Very few indicators in technical analysis stood the test of time and have proven to be trustworthy. The MACD indicator that was created almost half a century ago is among them.

Because of its versatility, this comparatively simple technical tool can easily be combined with any other indicator and can be used with the majority of classic trading strategies.

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