How to choose trading style and markets to trade
Financial markets are huge; you can buy spot, long and short crypto via derivatives, trade legacy markets via futures, options, or CFDs, and trade spot forex, stocks or options.
This often tends to be an overwhelming experience as traders try to be always at the top of everything but end up just losing track and money of what is going on in the end.
In this article, we will take a look at different possibilities, and hopefully, I will be able to help you with your future decision making.
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How much money do you have?
When it comes to trading, to make money, you also need money (duh).
If you are running any discretionary strategy with proper risk management, you will most likely end up measuring your returns in R.
R is one unit of risk.
For example, if you are trading with $10,000 and your one unit of risk (one R) equals 2% of your account, you risk $200 on each trade.
Well, that is not much if you run a trading strategy that only trades one market on some higher timeframes, which equals taking one trade every week on average.
If you end up taking five trades a month, the first two of those will result in losses, and three will be winners with your return of 2R (twice a risk). You just made approx $800 before commissions.
That won’t cover living expenses in the vast majority of countries.
Now let’s say you risk 1%, but you take 20 trades a week with an active day trading approach.
After around 100 trades in a month with a 50% win rate and fixed risk to rewards of 2, your results will look like this.
The mean of this equity curve puts you around $4000 monthly gain.
This is still not much to live comfortably and grow your account, but it is much better.
Of course, taking five trades every day requires a lot of work and either day trading many markets or scalping one or two is a very hard thing to do, but not impossible.
Let’s quickly revisit the passive approach with five trades in a month, but with 250,000 Euros in the trading account.
Running any equity simulation with only five trades is too small of an example, but if we look at simulation with 60 trades that equals one trading year, your equity will look something like this.
Although there was an occasion where traders ended up at breakeven, the mean of this curve is at around 400,000 Euros.
It is fair to say that making 200k in the year will cover living costs in most parts of the world.
This is important; if you have the money, you can afford the luxury to take fewer trades and still realize decent gains at the end of the year.
Of course, this does not mean that if you have a lot of money, you should not be day trading at all; the well-known traders such as Paul Rotter and Navinder Singh Sarao focused on day trading, making millions every day.
But for most people that I talked to and are starting in the four or lower 5 figure range will take ages to grow account with passive swing trading.
Although if you look at social media where people are promoting a trading lifestyle which equals trading from your phone for 10 minutes a day, in reality, markets are pretty complex.
As I mentioned in the beginning, there are many things you can trade, in that regard, the choice is really up to you and what you find interesting.
Of course, every market has its dynamics, but that is way beyond the scope of this article to cover.
What is essential is to understand how much time you can dedicate to trading.
If trading is something, you can only commit a few hours a day you can either take intra-week/intra-month swing trades or daytrade during active hours of each market.
This will depend on your personality and how much money you can dedicate to trading.
Let’s break down each approach to greater detail.
There is a quite difference between day trading and scalping, which not many people understand.
In my eyes, scalping is fast in and out from in the markets.
Trades last a couple of minutes, if not seconds, and traders usually take a lot of them during the day.
Scalping is extremely difficult; it requires fast reactions, understanding markets you are trading, and not getting eaten up by trading commissions along the way.
On the other hand, if done properly, scalping will grow your account the fastest.
You can start with a tiny amount of money and scalp your way up rather quickly.
Although scalping is not the choice of many people as they cannot make fast enough decisions, it offers certain flexibility as you will just participate in the markets for a few hours each day and always remain flat at the end of your trading session.
Scalping can (and, in my opinion, should) be simple.
There is no reason to care about macro-economic events, looks at the variety of timeframes or use way too many indicators.
Scalpers usually trade simple price action with basic orderflow tools such as depth of market (DOM).
Sometimes, this can be added with volume profile indicators or even simple indicators such as moving averages or VWAP.
Here you can see what a simple scalping setup could look like for Bitcoin on Exocharts.
The trader would use a 30minute chart to pick up general levels of support and resistance where they want to participate.
This might sound pretty simple, but in fact, it requires endless hours of practice and, most importantly, understanding the chosen markets.
Because of that, you will rarely see scalpers trading more than one or two markets, since it is almost impossible to focus on a handful of markets throughout the day, and it is also useless pickup up scalp trades is not complicated if traders pick times of increased volatility.
The increase of volatility once again depends on the market of choice, but most markets move during time windows such as London Open (8 AM GMT), RTH Open (8:30EST), London Close (6 PM GMT), Settlement of US index futures (3 PM CT).
Scalping requires 100% of focus and quick decision making, you can make a lot of money fairly quickly, but if you stop paying attention, you can also lose them at extreme speed.
Daytrading can be considered a little more laid back but still an active approach to trading.
You are not chasing every rotation but rather focusing on full intraday rotations.
The goal of day traders is to trade intraday swings in price and stay in trades as long as possible.
Still, day traders rarely hold trades overnight as they tend to see every day as a completely new environment and trade based on market information from a given day.
The number of markets is still small, but since you will be most likely executing your trades on something like 5 minute or non-time based chart that is not too fast and coming closer to that 5 minutes per rotation, you will have time to explore more markets.
I would still say there is no reason to go crazy and sticking to 2-4 markets is ideal as you will be finding plenty of trading opportunities during the day.
Once again you want to trade when markets are moving, compared to scalpers you need to be active throughout the whole day as the market can reach your level of interest, which can be anything from 60-minute level, daily level or market profile structure any time of the day.
This doesn’t mean that you need to be glued to screens the whole day, you can work with alerts and only spend time in front of charts at those higher volatility windows as moves are more likely to happen.
But for someone who is busy with day-to-day life due to work or family, day trading can be complicated.
You can of course adjust things based on your personal schedule and come in peace with fact that you will be missing some trades.
Some of you might be wondering that since you are picking trades on higher timeframes such as 60minute or daily charts why not just stick to those timeframes completely?
Looking at the chart above on the left side, you have Crude Oil on 60-minute timeframes.
As you can see, the market established 60minute resistance, tried to break above it, and then came to test it again; this is a decent opportunity for short targeting new low.
If you are trading a 60minute chart, you are entering at the level with a stop above the swing high; this would result in little over 3R trade, which is of course, great.
Returning over three times your risk in a couple of hours is great, but let’s have a look at the 5-minute chart on the right.
On the 5-minute timeframe, we can see the cumulative volume delta at the bottom with a massive increase in market buying into the level.
Once the level is hit, Oil almost immediately starts failing.
If you manage to execute the same trade on a 5-minute chart with tight stop-loss as you have additional orderflow confluence with likely trapped buyers, you will return almost 10R on the same trade.
Of course, not all trades will be like this and making 10R on a single trade is extreme, but it can happen occasionally.
The disadvantage of lower timeframe execution is that you could easily get shaken out from one more push higher before a real selloff occurred.
So those that chose wider H1 stop would still be in position, but day traders would need to re-enter with already losing 1R.
This Bitcoin chart demonstrates it quite well.
Failure at resistance and taking a trade with a wider stop would keep the trader in trade and result in approx 3R.
Daytrader would jump in once the 5-minute chart started to break down and would get immediately stopped out with a tight stop that was giving him the opportunity for 7R trade.
You might now think that it is not a big deal as he would re-enter on another failure of that resistance and still end up with 6R in the end.
This is true in hindsight, but you will very often find out that decisions are not so easily made in the heat of the moment.
This hybrid day trading/swing trading approach is something I focus on. Pickup up strong levels and executing trades to maximize your risk-reward ratio is key to growing your account.
If you are interested in learning more, check out the Tradingriot Bootcamp.
For me, anything above the 30-minute chart can be defined as swing trading.
You are not opening trades with the intention of closing them on the same day.
Your trading timeframes can be anything from hourly, H4 or daily timeframe.
The general rule is that the higher the timeframe, the less time is needed to spend in front of charts and fewer trading opportunities.
If I would pick up something straightforward, such as trading a support and resistance flip on the ETH H4 chart.
From the start of this year, you would execute four trades so far (as of today, February 17th 2022).
As you are only placing limit orders on these prior levels, you have at least 24hours for each of those to test your level; this, of course, allows you only to look at the chart once or twice a day for an hour or two.
Your results with this strategy would be currently sitting with a 5R profit.
If we look back at the start of the article at two different account balances, on $10,000 with 2% risk per trade, this 5R represents $1000 profit, not much in almost two months of work.
On a $250,000 account where 1R equals $5,000 (2% risk), we are looking at a $25,000 profit; that’s much better.
But swing traders that execute their trades on a 4-hour timeframe rarely trade only one market. However, it might seem like with adding more markets your screen time is not going to increase that much, but your reward can increase exponentially; swing trading lot of markets brings new sets of problems.
Markets and their correlations
As I already said, there are a lot of things to trade.
What most people don’t understand is that end the end of the day, you are only trading two things, volatility and risk-on vs risk-off sentiment in the market.
This is not an issue for short-term traders as they only care about capturing quick moves in price, which are often caused by inefficiencies in price action and heavy positioning on one side that ends up getting trapped.
But when it comes to swing trading, this is a great deal.
When it comes to volatility, things are relatively simple.
In most straightforward terms, volatility measures how much markets are moving.
There are two types of markets, thin and thick markets.
In the picture above you can see 2 DOMs, on left there is Euro-Stoxx and on right you have Dax.
These two markets have almost 1:1 correlation yet their movements are highly dependent on their liquidity.
Stoxx is thick and the liquid market as all price points in the order book are heavily populated therefore it takes more effort to move it.
Dax is a thin market with fewer resting orders in the order book therefore when it moves it will move more.
Thin markets are often more “jumpy” as they overshoot levels and overall move more during the trends.
As shown on H4 charts of S&P500 and Nasdaq, which once again have almost 1:1 correlation, during the selloff from January 4th to January 11th, Nasdaq declined almost 10% while S&P500 only 5.
This is important to understand because you can adjust your strategy and expectations according to that.
For thin markets, you should be expecting deeper pullbacks and a higher possibility of “running” the stops compared to thick markets, which often behave much slower.
Risk-on/risk-off and correlations
The basics of market correlations come into what is called risk-on and risk-off sentiment.
When traders are in risk-on sentiment, it simply means they have an appetite for risk.
They jump into assets that bring elevated risk, often due to higher volatility.
These assets are crypto, index futures, stocks or some commodities.
We could see a prime example of a risk-on environment after the covid crash where all markets mentioned above rallied heavily together.
There is simply no appetite for risk during the risk-off, and traders sell their risk-on assets to buy things such as bonds, gold, dollar, or other safe-haven currencies.
But there are also inner-market correlations.
The table above shows correlations in crypto markets; although they are not 1:1 they are still very high.
As a swing trader who is trading plenty of markets, if you for whatever reason decide to long Bitcoin and 5 other altcoins at the same time and the whole market will tank during the next couple of days, there is a high likelihood all those trades will result in losses.
In forex, this is more so the same thing.
Although correlations might not be 1:1 and this correlation table only show 1-day of data, you are betting on Dollar weakness or strength at the end of the day.
If you, for example long EURUSD and GBPUSD at the same time into an event that will benefit strength for the US Dollar, both of these positions are very likely to fail, and you just doubled your losses on what you didn’t understand is generally one trade.
Jumping into the AUD/USD and NZD/USD long trade after the impulse move would have the same outcome as those two pairs are almost 1:1 correlated.
The same outcome would be taking a long in both Bitcoin and ETH at the same time after bouncing from the level of support; you can also notice how BTC declined 3% compared to ETH that went don’t over 6%, this comes back to the volatility of each market and the fact ETH being thinner-less liquid market.
Any robust swing strategy should consider correlations so you are not going to find yourself on the wrong side of the same trading idea but with multiple positions.
Using correct tools for different trading styles
There has been a huge increase in popularity of using orderflow in past years.
The thing is that many people use this as an opportunity to get engagement by posting footprint charts and other orderflow tools on higher timeframes to the clueless audience.
I have covered this topic more on youtube recently.
When it comes to markets, it is fairly simple, the longer you hold the trade more exposed you are to fundamentals that affect the given market.
As I mentioned previously, lower timeframe traders often benefit from short term “stop runs” or other situations that move markets for a short period.
But the longer you are in a trade, the more randomness you can expect from the market.
You went long Bitcoin, and after two days, some unexpected news caused the market to absolutely tank within a couple of minutes?
That’s unfortunate but highly probable for those that focus on swing trading.
Of course, these black swan events can happen for day traders as well, and they can cause even more damage as your positions can get massive slippage, but your time in the market is much shorter, therefore, it is less likely to happen.
Because of this, taking swing trades in the right fundamental environment is the key.
Buy altcoins at a key technical level will still not perform well if crypto as a whole is in a downtrend. There is no new money flowing into the space, same as picking up stocks when the whole market is in risk-off sentiment, and traders are not interested in buying; in those times, your technical analysis is not going to save you.
Always staying ahead of the game.
If you have decided what markets or trading approach are you going to pursue, you should never forget that you are trading against the most intelligent people and algorithms in the world.
Same as day traders should do their best to get familiar with the market they are trading through the market replays or screen time, swing traders that don’t need to trade frequently should spend their time to stay ahead of all global events or backtest their approach through a variety of different markets and finding a way how they can improve their results when they trade.
It is worth understanding that for short term traders making mistakes in trade is nothing too bad as the next opportunity is waiting just around the corner, but if you only take a few trades in the month, you better be sure that you have a flawless process from start to finish.
No matter how much money you have for the start or what your schedule is, you should always take trading seriously otherwise, you will be just wasting your hard-earned money.
I know people who work full-time jobs, and they are still able to find time to focus on day trading or at least spend a few hours in the morning and evening to monitor different markets and place orders for possible swing trades.
The great thing about trading is that you don’t need to be good at everything, all you need is to focus on one thing, one trading approach with one or a handful of markets and if you stick to it long enough you should see positive results sooner or later.
In Tradingriot Bootcamp, I cover different trading approaches from day trading to long term swing trading and what tools you can utilize for trading.
Just remember that trading should be viewed as a long term game instead of trying to get rich quick scheme.
With proper risk management and a robust trading strategy, choosing markets for trading and trading style should be just a minor detail that will suit your lifestyle.