Types of Forex Traders
Are you still confused about what strategy to trade forex using? If so, then maybe it’s a good idea to know in advance what type of forex trader suits your character. After knowing it, then you can strategize by imitating other traders of the same type, or develop your own strategy based on your type.
In general, the types of forex traders can be divided into several types based on the analysis technique and the trading period. There are three types of forex traders based on their analytical techniques, namely fundamental traders, technical traders, sentiment traders, and traders who apply a mixture of various analytical techniques. Types of traders based on the trading period can also be divided into four, namely scalpers, day-traders, news-traders, and swing-traders. The following is a full review, including the characteristics and weaknesses, and advantages of each type of forex trader.
Types of Forex Traders Based on Analysis Techniques
- Fundamental Traders
Forex traders who use fundamental analysis will examine various economic data and socio-political news as the basis for making trading decisions. The forex calendar and newsfeed are their main trading infrastructure. Monitoring the news directly from first-hand news agencies, such as Reuters and Bloomberg.
Before transacting on a currency, they will research the economic background of the country of origin of the currency, from its history to its prospects. Therefore, this technique can generally only be done by traders who have a background in economics. Most fundamental traders have high accuracy but are more suitable for long-term trading (open positions for more than 1 day).
Weaknesses: Fundamental traders often incorrectly determine the entry (open position) and exit (close position) levels, if they do not use technical indicators.
- Technical Trader
Unlike the previous types of traders, technical analysis users are actually indifferent to economic data and news circulating in the media. They rely entirely on technical indicators or monitoring the movement of price charts only (Price Action) as a decision-making material. At the beginner stage, they will experiment with various types of technical indicators found on online trading platforms. Then, they develop their own trading system based on the combination of indicators that they feel are the most suitable.
Once more experienced, technical traders may try to design an Expert Advisor (Trading Robot) that can help them trade forex 24 hours non-stop. The efficiency of technical traders is very high, so they can open and close positions repeatedly in one day, with or without the help of robots. However, the accuracy of each trading position is not as high as fundamental traders.
Why is the accuracy of technical traders low? Because they ignore the fundamental aspects that underlie price movements and they are blind to the forex calendar. Worst-case scenario example: they will trade based on certain parameters almost automatically at the time of an important news release. As a result, the anomaly of price movements results in an instant spike that makes the account balance run out in an instant.
- Sentiment Traders
Sentiment traders do not base their decisions on fundamental or technical analysis. Instead, they will look for traders’ sentiment buying/selling data (trader sentiment) to see whether the tendency of the majority of traders towards a currency pair is bullish or bearish. After that, they can open positions according to the majority trend ( trend-trading ) or against the majority ( counter-trend ).
The main drawback of this type of trader is that due to the non-centralized nature of the forex market, there is no truly comprehensive data on trader sentiment internationally. Therefore, the data that can be used is only trader sentiment data per broker which is sometimes inaccurate. Likewise, not all brokers are willing to provide sell/buy sentiment data.
- Mix Trader
Mixed traders usually mix all types of analysis as a basis for making trading decisions. They examine the fundamental aspects of currencies, use technical indicators, also look at the sentiment of the majority of traders. With so many considerations, they hope that their trading decisions will have higher accuracy.
Theoretically, this type of forex trader is the best. However, there are two fatal drawbacks. First, if the trader has not made a clear system, it will be easy to change his mind. Second, decision-making can take a very long time. Therefore, if you want to be a mixed type of trader, you must first prepare a mature trading system.
Types of Forex Traders by Trading Period
The scalper trader type will open and close positions in less than an hour, or even just a few minutes. The goal of a scalper is to get small profits repeatedly, so it is hoped that over time it will become a hill. In forex trading activities, scalpers will use a time frame of under 1 hour (Hourly/H1), which is between ticks, 5 Minutes, 15 Minutes, and the like. They are usually active in the European trading session to overlap the American session because these times offer the highest price fluctuations in a day.
All scalpers take advantage of technical indicators, even not infrequently use robots. Therefore, scalpers are very productive and can open and close up to hundreds of trading positions in one day. However, the drawbacks are relatively low trading accuracy and high trading costs (spreads and commissions).
- Day Trader
Day-Trader is a type of forex trader who opens and closes trading positions on the same day, but the frequency is not as high as scalpers. A day-trader can apply only fundamental analysis, only technical analysis, only sentiment analysis, or a combination of all of them at once. Day-traders usually take advantage of time frames below daily (Daily/D1), namely between H1, H4, and the like.
Because it is not as strict as a scalper, day-traders are also freer in determining the trading session. They can start in the Asian or European trading sessions, then close their trading positions in the American session. The majority of professional traders are day traders.
Basically, swing traders look for opportunities to open positions when there is a significant trend change, then hold on to it until there is another indication of a new trend change. Therefore, they take advantage of fundamental analysis and long-term time frames (starting from Daily, Weekly, to Monthly).
Swing traders can maintain open trading positions for a very long time, from a few days to months. The trading volume and profit targets are huge between 200-500 pips. To protect trading positions from annoying momentary price fluctuations ( noise ), swing traders usually prepare a fairly large balance cushion.
News-Trader is a type of forex trader who is only active before and after the release of important news. This type of trader may only trade 1-3 times per month, but each time trading will use a large volume (lot). Some of the moments that news-traders have been waiting for include: the release of the US Non-farm Payroll (NFP) news, Super Thursday (release of the UK inflation and interest rate report), and the US central bank’s monetary policy meeting (FOMC Meeting).
Price movements at these moments are usually higher and faster than normal situations, so news traders consider profits quite adequate from trading during those moments alone. On the downside, high price fluctuations also open the possibility of greater losses at a faster tempo. Therefore, it takes a greater stock of capital and guts to become a news-trader.