Hybrid Trading

For those who aren't comfortable with purely mechanical systems or those who get carried away by their emotions in using a 100% discretionary approach, a hybrid trading style could work better for you. If applied properly, this type of trading can combine the best of both worlds and be a better way to trade for you.

What's the difference between a mechanical and discretionary trading style anyway?

A purely mechanical system requires the trader to trust a system of signals based on price based indicators to give valid entry/exit points to produce profits over the long run. Since all you have to do is wait for a valid signal and take the trade, using a mechanical system can eliminate the psychological aspect (fear and greed) out of your trading decision. While trading emotion free can be great, the downside is that there will be times when the mechanical system gives trade signals that don't jive with the current fundamental bias or market environment.

On the other hand, a purely discretionary trading approach involves taking trades based on where your own analysis of fundamentals, price action, or risk sentiment. While this type of trading takes the current market environment into account, it could to lead to inconsistent results when applied by a trader easily influenced by emotions and/or personal biases.

How can a hybrid trading approach solve all that?

Hybrid trading combines the objective trading rules of a mechanical system with discretionary decisions of the trader based on dominant market themes, current risk sentiment, price action, and recent economic events.

The advantage of using a hybrid system is that the system is developed on your understanding of the market and YOUR trading personality. Ideally, the system will incorporate the indicators and parameters that you are most comfortable with and intuitively understand.

By using a hybrid system, you can choose to take the trades that make the most sense. Remember that one drawback of taking a purely mechanical system is that it cannot distinguish between changing market environments.

Let's say that the market has been ranging lately and you get a signal to go short. However, your system is a trend-following system and you feel that if you take the signal, you are just going to get chopped up. By incorporating a hybrid system, you can use your ability to adapt to the current market conditions to override the signal, therefore enhancing your system and avoiding possible losses.

Be careful though, as this is where it can be very tricky. If one were to simply override all the trade signals without any basis (like past price action), then what would be the point of having a system at all? Always keep in mind that the subjective part of a hybrid system is meant to compliment the system's trading rules in order to maximize profits - not to ignore it completely!

As tricky as the hybrid system can be, the preparation needed is pretty simple.

You can begin by keeping a record of how price reacted to news reports, different market themes, and market structures. Documenting price action might be tedious and labor-intensive at first, but with A LOT of deliberate practice, it will help you develop a knack for spotting similar setups in the future. After all, the phrase "history repeats itself" didn't become famous for no reason.

Summary: What type of Trader are you?

There are four main types of traders:

The Scalper

The Day Trader

The Swing Trader

The Position Trader

Scalpers hold onto for a few seconds to a few minutes at the most. Their main objective is to grab very small amounts of pips as many times as they can throughout the busiest times of the day.

Day traders usually pick side at the beginning of the day, acting on their bias, and then finishing the day with either a profit or a loss. These kinds of traders do not hold their trades overnight.

Swing traders are for those people that like to hold on to trades for several days at a time. These types of traders can't monitor their charts throughout the day so they dedicate a couple hours analyzing the market every night to make sound trading decisions.

Position traders are those that have trades that last for several weeks, months, or even years. These traders know that fundamental themes will be the predominant factor when analyzing the markets and therefore make their trading decisions based on them.

No matter what style you choose, you have to make sure that it is truly you.

Always changing your trading style can lead to trouble and is a sure fire way to the doghouse.

But if you try scalping and you realize after a week that it's too fast or too draining, then be flexible enough to switch it up.

Position Trader

Position trading is the longest term trading and can have trades that last for several months to several years!

This kind of trading is reserved for the ultra-patient traders, and requires a good understanding of the fundamentals.

Because position trading is held for so long, fundamental themes will be the predominant focus when analyzing the markets.

Fundamentals dictate the long term trends of currency pairs and it is important that you understand how economic data affects your countries and its future outlook.

Because of the lengthy holding time of your trades, your stop losses will be very large.

You must make sure you are well capitalized or you will most likely get margin called.

For an idea of how much money you should have in your trading account, check out our money management lesson.

Position trading also requires thick skin because it is almost guaranteed that your trades will go against you at one point or another.

These won't just be little retracements either.

You may experience huge swings and you must be ready and have absolute trust in your analysis in order to remain calm during these times.

You might be a position trader if:

You are an independent thinker. You have to be able to ignore popular opinion and make your own educated guesses as to where the market is going.

You have a great understanding of fundamentals and have good foresight into how they affect your currency pair in the long run.

You have thick skin and can weather any retracements you face.

You have enough capital to withstand several hundred pips if the market goes against you

You don't mind waiting for your grand reward. Long term trading can net you several hundred to several thousands of pips. If you get excited being up 50 pips and already want to exit your trade, consider moving to a shorter term trading style.

You are extremely patient and calm.

You might NOT be a position trader if:

You easily get swayed by popular opinions on the markets.

You don't have a good understanding of how fundamentals affect the markets in the long run.

You aren't patient. Even if you are somewhat patient, this still might not be the trading style for you. You have to be the ultimate zen master when it comes to being this kind of patient!

You don't have enough starting capital.

You don't like it when the market goes against you.

You like seeing your results fast. You may not mind waiting a few days, but several months or even years is just too long for you to wait.

Swing Trading

Swing trading is a longer term trading style that requires patience to hold your trades for several days at a time.

It is ideal for those who can't monitor their charts throughout the day but can dedicate a couple of hours analyzing the market every night.

This is probably best suited for those who have full time jobs or school, but have enough free time to stay up-to- date with what is going on in the global economies.

Swing trading attempts to identify medium term trends and enter only when there seems to be a high probability of winning.

Because trades last much longer than one day, larger stop losses are required to weather volatility, and a trader must adapt that to their money management plan.

You will most likely see trades go against you during the holding time since there can be many fluctuations of the price during the shorter time frames.

It is important that you are able to remain calm during these times and trust in your analysis.

Since trades usually have larger targets, spreads won't have as much of an impact to your overall profits. As a result, trading pairs with larger spreads and lower liquidity is acceptable.

You might want to be a swing trader if:

You don't mind holding your trades for several days.

You are willing to take fewer trades, but more careful to make sure your trades are very good setups.

You don't mind having large stop losses.

You are patient.

You are able to remain calm when trades move against you.

You might NOT want to be a swing trader if:

You like fast paced, action-packed trading.

You are impatient and like to know whether you are right or wrong immediately.

You get sweaty and anxious when trades go against you.

You can't spend a couple of hours every day to analyze the markets.

You can't give up your World of Warcraft raiding sessions.

If you have a full time job but enjoy trading on the side, then swing trading might be more your style!

Day Trading

Day trading is another short term trading style, but unlike scalping, you are typically only taking one trade a day and closing it out when the day is over. These traders like picking a side at the beginning of the day, acting on their bias, and then finishing the day with either a profit or a loss. They DON'T like holding their trades overnight.

Day traders are suited for those that have enough time throughout the day to analyze, execute and monitor a trade. If you think scalping is too fast but swing trading is a bit slow for your taste, then day trading might be for you.

You might be a day trader if:

You like beginning and ending a trade within one day.

You have time to analyze the markets at the beginning of the day and can monitor it throughout the day.

You like to know whether or not you win or lose at the end of the day.

You might NOT be a day trader if:

You like longer or shorter term trading.

You don't have time to analyze the markets and monitor it throughout the day.

You have a day job.

Some things to consider if you decide to day trade:

Do you have time to monitor your trade?

If you have a full time job, consider how you will manage your time between your work and trading. Basically....don't get fired from your job because you are always looking at your charts!

Types of Day Trading

1. Trend Trading
2. Countertrend Trading
3. Breakout Trading

Trend trading

Trend trading is when you look at a longer time frame chart and determine an overall trend. Once the overall trend is established, you move to a smaller time frame chart and look for trading opportunities in the direction of that trend. Using indicators on the shorter time frame chart will give you an idea of when to time your entries

First determine what the overall trend is by looking at a longer time frame. You can use indicators to help you confirm the trend.

Once you determine the overall trend, you can then move to a smaller timeframe and look for entries in the same direction.

Countertrend trading

Counter trend trading is similar to trend trading except that once you determine your overall trend, you look for trades in the opposite direction. The idea here is to find the end of a trend and get in early when the trend reverses. This is a little more risky but can have huge payoffs.

Since our thinking is "counter-trend", we would look for trades in the opposite direction of the overall trend on a smaller timeframe such as a 15 minute chart.

Remember that going opposite of the trend is very risky, but if timed correctly, can have huge rewards!

Breakout trading

Breakout trading is when you look at the range a pair has made during certain hours of the day and then placing trades on either side, hoping to catch a breakout in either direction. This is particularly effective when a pair has been a tight range because it is usually an indication that the pair is about to make a big move. Your goal here is to set yourself up so that when the move takes place you are ready to catch the wave!

Scalping

Scalping

Scalping is like those high action thriller movies that keep you on the edge of your seat. It's fast paced, exciting, and mind-rattling all at once. These types of trades are usually only held onto for a few seconds to a few minutes at the most! The main objective for scalpers is to grab very small amounts of pips as many times as they can throughout the busiest times of the day.

Because scalpers basically have to be glued to the charts, it is best suited for those who can spend several hours of undivided attention to their trading.

It requires intense focus and quick thinking to be successful.

It is not for those looking to make big wins all the time, but rather for those who like raking in small profit

 You might be a scalper if:

You like fast trading and excitement

You don't mind being focused on your charts for several hours at a time

You are an impatient person who doesn't like to wait for long trades

You can think fast and change bias, or direction, quickly

You have fast fingers (put those Starcraft 2 skills to work!)

You are a surgeon!

You might NOT be a scalper if:

You easily get stressed in fast moving environments

You can't commit several hours of undivided attention to your charts

You'd rather make fewer trades with higher profit gains

You like taking your time to analyze the overall picture of the market

Some things to consider if you decide to scalp:

Trade only the most liquid pairs

Pairs such as the EUR/USD, GBP/USD, USD/CHF, and USD/JPY offer the tightest spreads because they tend to have the highest trading volume. You want your spreads to be as tight as possible since you will be entering the market frequently.

Trade only during the busiest times of the day

The most liquid times of the day are during the session overlaps. This is from 2:00 am to 4:00 am and from 8:00 am to 12:00 noon Eastern Time (EST).

Make sure to account for the spread

Because you enter the market frequently, spreads will be a big factor in your overall profit. Be sure you're targets are at least double your spread so that you can account for the times the market moves against you.

Try focusing on one pair first

Scalping is very intense and if you can put all your energy in one pair, you'll have a better chance at being successful. If you start to get accustomed to the pace of things, then you can start by adding on another pair and see how it works for you.

Make sure you follow good money management

This goes for any type of trading, but since you are making so many trades within a day it is especially important that you are sticking to good money management practices.

Major news reports can throw you off

Because of slippage and high volatility, trading around highly anticipated news reports can be very dangerous. It sucks when you unexpectedly see price jump in the opposite direction of your trade because of a news report! Be prepared and know what's coming out

Daily routine Pre-Market analysis

Many Traders wander aimlessly through their trading day, taking new trade positions on the fly, just because it “feels right”, especially in the excitement of the moment when the price is moving without them.

It can be a costly habit, entering a trading day being unprepared for what lies ahead, without a Trading Plan or even a Traders Daily Routine checklist. When you consider that professional traders prepare for 2 or 3 hours before the markets opening bell, it shows how serious they value their work and money.

Good trading habits can only be formed by repeating a good preparation routine. Only when the routine is carried out consistently, you can expect consistent trading success.

The time before the market opens is crucial for getting an overall feel for the day’s market, finding potential trades, creating a daily watch list and, finally, checking up on existing positions. Here is a summary of how to  prepare Daily  Pre-Market:

•     Journal – Self Analysis before trading
•     Evaluate the Market Trend (bullish/bearish trends on multiple time-frames)
•     Overall Market Sentiment (bullish/bearish sentiment, key economic reports, inflation, currency,  etc.)
•     Open Positions Review (news, earnings, etc.)

Find Potential Trades

Next, the trader will scan for potential trades for the day. So whether your Trade Entry Method is through Fundamental Analysis, Technical Analysis, or a combination of both, it is key that you follow your trading plan.

Know what the Trade Entry Method 
is that you are looking for, list of opportunities, entry limit prices, profit target prices and stop-loss prices for the day.A few basic filtering methods that could be used are :

•     price action
•     candlestick patterns
•     Support & Resistance
•     Compare the next smallest Time-frame chart

So there are other criteria you can filter with to ensure you are also in tune with what the Market is telling you, and also being disciplined to follow your Trade Money Management Rules in your Written Trading Plan. Some examples of these are:

•     Being in tune with the Market Trend
•     Being in tune with the Market Sentiment
•     Following your Money Management Rules

The Bottom Line

Looking at the daily routine of the typical trader, it is evident that the pre-market routine is paramount to successful trading. This is the time when trading opportunities are located and the day is planned. Market hours are simply a time of entering and exiting positions, not devising any new plans. And finally, after hours is just a time to review the trades for the day and assess performance. Adopting a daily trading routine such as this one can help you improve your trading and ultimately beat market returns. It just takes some good resources and proper planning and preparation.

Which Type of Trader Are You?

Scalper, Day Trader, Swing Trader, or Position Trader. What are you?

Each Trader is Unique

There are over 8 billion people in the world (including space aliens disguised as humans) and not one person is exactly the same as another. Even identical twins will have different fingerprints.

Everyone has their own look, personality, talents, and pizza topping preferences (we like pepperoni and potato chips). We all like different things and are unique in our own way.

Trading is the same way. Our unique personalities will lead us to trade differently from one another. Some may be aggressive, "type A" personality traders while others may be more relax, "type B" personality traders. Some may like taking small wins all the time, while others don't mind losing a bit in order to make those huge gains when they do win.

The point is that no two traders are alike. Even if a group of people were to trade the same system rules, each person's end results would most likely be different from everyone else.

Is that a bad thing? Not at all!

Our uniqueness is what makes the world go round, so it's important to know your lifestyle and personality to help identify trading strengths and weaknesses. Trying to force a trade that doesn't match your personality will result in frustration and can hinder you from making consistent profits.

Time is Money

A common mistake by many new traders is that they think they can make money... fast! While it's true you can make money in a short amount of time, it doesn't mean you will end up profitable in the long run.

A typical scenario is that a new trader reads a little bit about trading forex, finds a system online that claims to make money quickly, and then jumps right into trading because he feels like he's got enough of a background to make millions of dollars.

Unfortunately after the "honeymoon" period is over and the excitement settles down, this new trader now realizes that trading isn't as easy as he thought. The system doesn't seem to be working like it claimed it would and he has no idea why the market is doing what it's doing.

The most important thing you can invest in as a trader is your TIME! Every single trading day is a learning experience and if you stop learning, then you will never become a truly successful trader.

Take into account how much time it will take you to learn the basics. Then consider how much time it will take in your daily routine to read charts, news reports, record your trades, and be in the markets.

For someone who can dedicate a "full-time" job mentality to trading, then this is no problem. However, if you're like most people, you may have a job, school work, tuba lessons, World of Warcraft dailies, so you cannot exactly dedicate your entire day to trading.

This doesn't mean that you can't trade, but it should give you some realistic expectations when it comes to determining your trading style. You probably can't be a scalper or day trader, but maybe longer term trades will work better for your schedule.

Each day requires your time to analyze the market. Because news makes the market move, it's important to consider the economic developments going on around the world and to make it part of your daily routine.

What type of trader are you? The Anatomy of a Forex Trader.