The 4 (plus 1) Signal Provider categories
We have said that every trader, ie each Signal Provider, is unique, because each person carries in trading the total sum of his experiences, mentality and psychology.
This is why it will be difficult to find two traders completely equal, unless they both use the same Expert Advisor, but that’s another story.
However, using the parameters we saw in the previous chapter, we can classify Signal Provider into categories. Let’s see the most famous.
Long Term Signal Providers
Trading over the long term means trying to ride big price movements, also called trend. These movements can last for days, weeks, sometimes even months.
A Signal Provider that applies this kind of strategy usually makes several attempts to try to take the right start of the trend. During these attempts, he often undergoes a lot of stop-loss, which, however, are usually small in terms of pips. When, instead, the trend starts, then with some positions he remains steady inside the movement, trying to ride it as much as possible, then he closes those few operations with large profits.
These characteristics make sure that the statistics usually show a low winning percentage, because of the different attempts to find the start of the trend, but compensated by a very high risk/reward, because the average amount of pips of the profitable transactions are much higher than that one of the losing operations.
Day Trading Signal Providers
A Day Trader usually opens one or more positions during the day, with the intent to close them in the same day or at least on the next day, rarely two days later. Therefore, the duration of his trade goes from a few hours to two/three days maximum.
This Signal Provider is trying both to ride those little trends that sometimes forms in a single day, and also to take advantage of the many days of range, ie where the price continues to bounce within certain levels, without taking a definite direction.
By closing all his positions within the day, the average pip size, both of profits and stops, will be lower than the average range value for that particular currency pair. For example, if we consider that EUR/USD moves on average in a range of 160 pips per day, a day trader who operates in this pair will always have an average values of profit or stop below this value.
Swing Trading Signal Providers
Swing Trading is somewhere half way between the long-term trend following and the daily day trading.
This trader looks, with all the technical tools at his disposal, to identify the beginning of those market movements, sudden and decisive in a particular direction, called precisely swing.
Usually, the time horizon of this kind of trades is one to four trading days, in any case within a week.
Scalper Signal Providers
Traders who do scalping are the fastest of all. In a single day they can even make hundreds of transactions, but that usually last from a few seconds to a few minutes.
With a so limited time horizon, the expected profits per transaction are obviously of very few pips, as well as the stop. Everything takes place in a few minutes, for a few pips, for many times a day.
It’s a frantic trading, and very few traders are able to bear certain rhythms, and be in profit at the end of the day, without the use of Expert Advisor or automated programs.
Usually the winning percentage of these Signal Provider is high, but against a minimal extension of profit and a high number of transactions per day. The speed of positions handling and the minimum profits for operation make these traders, in many cases, difficult to replicate successfully.
Martingale Signal Providers
The martingale is not a specific traders category, but rather a trading technique that all four the above categories can use.
The trader who uses martingale technique has a special operations management when they get in loss. In practice, when a trade goes in loss is not closed, but left open. In addition, another one is opened in the same direction of the first one.
In other words, let’s suppose to have a buy operation , ie a bullish perspective. The more the price goes against the first operation, ie it falls down, the more the Signal Provider will open other operations in the same direction of the first one (Long), in order to lower the average entry price, or the break-even level.
In practice, when at some point the price will turn in the favorable direction and will begin to rise, the trader won’t have to wait for the price to go back to the price level of the first trade to be at least at break-even, since there will be the other transactions that will begin to earn pips.
The price, at which the sum of wins and losses of the various trades is equal, will be lower, so more achievable, compared to the price of the first trade, which will be much higher. This means “to lower the entry price” or “averaging down”.
These are the main categories under which, more or less, all the Signal Providers can be categorized. Obviously, there are many nuances in between these categories and boundaries are not always so definite.
In fact, many of the Signal Provider could easily fall into more categories, or could simply use, at the same time, techniques that belongs to different categories.
In the next lesson we will see what are the risks for a follower investor with each of these categories.