et's begin this discussion with the understanding that the definition of scalping, turn, swing, and position trading will vary from trader to trader
We need a baseline so I will describe each of these trading types as it pertains to how you may want to incorporate each into your approach to the markets and also which you find you may begin to adopt more actively into your trading day. There is one idea—I should say one myth—that needs to be dispelled. Trading types have nothing to do with how long you are in a trade. The idea that a trade is defined by the time spent in the market is ridiculous. Trade types are defined by how you enter a trade, not by its duration. There are only two reasons to exit a trade: because your stop-loss was reached or because your profit target was reached. The time it takes to do either is irrelevant. With that said, we'll cover scalping first.
Scalping, in my opinion, is an "advanced" type of trading, not because of the style itself, but because the speed at which you must be able to recognize the trade set up and execute the order.
Scalping is often the best choice for floor or pit traders since they have a unique vantage point and the quickest execution response to order flow. Scalping is typically done using very short-term intervals, like one-minute or tick charts. This is because scalpers want to be out before the slightest pullback. Scalp trades are done in the direction of the current trend and allow a trader to take small "bites" of the overall move. Scalpers may enter and exit a number of times along the same trend taking small pieces as the trend persists. Scalpers may not be the first ones in the trend, but they are always the first ones out. Quick thinking and quick reflexes prevail, and an error in judgment can often wipe out an entire day's profit.
If I sound a little down on scalping, that's my experience and personality coming through. It's my least favorite style. But let me add that quite a few of my close trading friends and partners are world-class scalpers and there are many people who enjoy the action and are comfortable with this style of trading, I just happen to not be one of them. If you are a new trader, please humor me and learn to momentum, swing, or position trade first then go seek the tutelage of an experienced and successful scalper when you are ready.
The next style well discuss is momentum trading. As I have mentioned before, this is my favorite style but not because I consciously chose it. I think you will discover that many times your style will choose you! Momentum traders wait for breakouts and breakdowns as a clear signal to a shift in momentum, coming out of a trading range or consolidation. Traders that prefer to trade chart patterns like triangles, pennants, and narrow sideways channels are typically momentum traders. Momentum traders stay in the trade for the duration of the trend's momentum and consequently will not sit through significant pullbacks. Which brings us to swing trading.
Swings can be defined as the pullbacks in uptrends and the bounces in downtrends. Swing trading is predicated upon the belief that once a trend is established it will continue until the trend shifts in the other direction and reverses. Swing traders will buy pullbacks in an established uptrend and short bounces in an established downtrend; chart analysis will show us specifically when to do so.
Swing trading is the best way to enter established trends since you will not buy into the highs or short into the lows. In fact, if you missed an initial entry in your momentum trade, it is often best to put on your "swing trading hat" and wait for a pullback or bounce if the trend continues.
When you have exited out of your entire position, that is what's called being "flat." A sell-stop is your stop-loss in an uptrend and would exit you from a long position; and a buy-stop is your stop-loss in a downtrend and would exit you from a short position. One idea I encourage all traders to adopt is to look at the market from both directions. When you are looking at a buy, take just a moment to see what someone who is thinking of selling might be seeing. Always, take a moment to step in the shoes of a trader who may be on the other side of your trade. Many people who come from an investing background will typically only look at the markets from the long side or as buyers. Doing this severely limits the opportunities that are available to you in any market. Professional traders sell short as frequently and as comfortably as the buy long. For those of you who may not be completely familiar with shorting, it is simply taking a trade that allows you to profit as a market falls. When we go long, we buy contracts in expectation of rising prices. We will eventually sell
'Mt z them and realize our profit. Conversely, when we short a market, we sell contacts in expectation of falling prices. We will eventually buy back these contracts and realize our profit if the market is lower than when we initially sold it. What I'd like you to come away with here is that each style has it's own rules. The entry rules are what distinguish one trading style from another.
Let's take a look at an example of a swing trade, and a momentum trade. Ch 15.1 shows the pullbacks within the uptrend. In this case we are looking a pullbacks to the Wave. You may of course use Fibonacci levels as well; personally I prefer the Wave. Just keep in mind that we are looking for "measured pullbacks or bounces." A measure pullback is simply a price level that we have determined before entering the trade will offer support or resistance within the context of the current
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trend. Measure pullbacks can also include psychological or "round numbers." Ch 15.2 shows the support of the uptrend line and the resistance of the downtrend line forming a triangle.
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Two Cornerstone Steps of Trade Setups
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