Are you unsure whether your trading style is closer to that of a scalper, day trader or a swing trader? Or are you perhaps a mixture of all three?
Whichever one applies to you, it's important to find out, because knowing your preferred trading style is a critical part of trading successfully in the long run. Why? Simply said, traders can reach the best synergy when their strategy and trading psychology are aligned.
Knowing which style suits you best remains a difficult question to answer, but luckily, this article will help you in multiple ways. First of all, it will explain all of the three styles in more depth, then it will identify the main differences between them, and lastly, it will compare them and provide an overall conclusion.
The Ins and Outs of Scalping (Short-term Trading)
The first trading style of this guide is called "scalping", which is a trading strategy wherein traders (called scalpers) aim to achieve greater profits from relatively small price changes.
Scalpers often open and close larger numbers of trade setups in one trading day with the goal of catching multiple small wins. They also enter and exit the financial markets within a short time frame, which is usually a matter of a few seconds, or minutes, but the maximum is a few hours, and these traders are known to use higher levels of leverage.
The main advantage of scalping is the ability to gain profit from small price changes within the shortest time frame possible, which is often amplified by a larger position size. This is an intra-day type of trading which means that positions are closed before the end of the trading day or session.
Scalping is known for its pace and quick executions. In the most extreme examples, trades are opened and closed within a few seconds, if a sufficient price movement has been made. Due to its high speed nature, traders need to be precise with their timing and execution.
So how do traders trade that quickly? Here are the 3 key tips:
- They usually make decisions on lower time frames, such as 1 to 5 minute charts.
- They typically wait for a strong confluence of support and resistance levels to find setups with the highest probabilities.
- Indicators are also a frequently used method for scalpers.
Usually these indicators are split into two different groups: 'Momentum' and 'Support and Resistance' (S&R). Momentum indicators are for example 'stochastics', MACD (moving average convergence divergence) and RSI (relative strength index) whereas S&R refers to Keltner channels, moving averages, and Pivot Points.
All in all, this trading style is known for its speed and the need to make quick decisions. Scalping systems often show a higher number of setups, higher win percentages, and lower reward to risk ratios (due to more frequent, and smaller wins, together with, less frequent but bigger losses). The main criteria is to keep the win percentage and win sizes large enough to cover the losses when they occur.
Day Trading Explained
Many traders think that day trading and scalping are similar. Although both trading styles do take place within one trading day, there are important differences that we need to highlight.
Day traders open and close substantially less setups compared with scalpers. These traders sometimes open one setup a day, and often not more than a couple per trading day. Although they both trade intraday, the day trader's strategy is to focus on the best opportunities of the day, and to hold on for a larger profit target. Therefore, a day trader usually holds on to a trade for several hours but not more than one full trading day.
Ultimately the goal of a day trader is to aim for a larger piece of the expected daily price movement within one trade. Here are 3 key aspects that swing traders need to keep their eye on:
- Day traders are waiting for the price to reach major decision spots on the chart, which offer the most profit potential in terms of the expected win percentage versus the expected size of the win.
- They need to be patient as the price moves up and down, with and against their position multiple times per day.
- They must also stick to their plan and not yield to the temptation of exiting a trade too soon, because otherwise they risk turning the trade into a scalping setup.
Simply put, the day trader's mission is to find the most profitable buying and selling spot of a financial instrument in one day, buying and holding on to that target for a reasonable amount of time. Day traders do use leverage, but they tend to utilise lower ratios than scalpers because their profit targets are larger.
The management of the trades usually require attention, but the burden can be reduced via pending orders, such as take profits, and using a trail stop loss. Admiral Markets offers a wide range of trade management tools with its MetaTrader Supreme Edition plugin, which boosts the existing features of MT4 & MT5, and provides traders with tools such as the 'Mini Terminal' and the 'Trade Terminal'. It's definitely worth checking it, because it helps to manage all of your trades effectively, whilst also keeping track of time in a efficient manner.
Day traders are known for mixing different styles of analyses into their trading plan. They often combine classical indicators, such as MACD and RSI, and price action, such as candlestick patterns, for determining trends, and support & resistance. Sometimes they also add patterns, like chart & wave patterns, for a better understanding of the overall chart and price structure.
Why Swing Trading?
The last trading style of our guide is called "swing trading", which is a trade setup where traders enter and exit sporadically, and spread this out over a few days or weeks.
Swing trading is a system where traders are aiming for intermediate-term trading opportunities, and is significantly different to long-term trading, which is when setups are open for weeks and even months at a time.
Swing traders are in many ways different to day traders or scalpers as well because:
- Swing traders often use relatively lower levels of leverage, although this is certainly not a must, and is all up to the trader.
- They tend to use a mixture of both fundamental and technical analyses.
- They aim for larger price targets and tend to wait longer for a trade to develop.
- They also use wider stop losses to provide more space for the price to move up and down, and also against their position.
In most cases, the trade setup is not closed within one day. Sometimes swing traders prefer to close the setup within one week before the weekend, whereas other swing traders are fine with holding for several weeks.
Swing traders can use different time frames, ranging from the weekly to the daily, and from 4 hour to 1 hour charts. Here are some examples of how traders can use them in various ways, although each trader will likely customise this to their own individual taste:
- Higher time frames are used for support, resistance, and trends.
- 4 hour charts for patterns.
- 1 and/or 4 hour charts for entries.
Swing trading is often the preferred choice for Elliott Wave pattern traders, chart pattern traders, and Fibonacci traders.
Comparing All Trading Styles
Which trading strategy is better? The answer is straightforward: it depends on you. The best trading style will vary from trader to trader and depends on several factors:
- Which trading style do you feel comfortable with?
- How much time do you have for entering, management, and exiting setups? (The more time you have, the more active you can be in the market)
- What are your trading goals? (Do you want to become a full-time trader or are you looking for extra income?)
- What style of trading do you prefer? (Do you like fundamental analysis, technical analysis, pattern trading, price action, or indicators?)
Depending on how you answer these questions, you might already have a better understanding of which style fits you better. Here is a general idea of all these different styles:
Source: overview of styles and differences
All in all, there is no right or wrong trading style. It all depends on, amongst other things, your own trading psychology, your time availability, your risk appetite, and which tools you prefer to use. Based on these answers, all traders need to make an informed choice that suits their lifestyle the best.
Finding the right choice is a key part of developing a trading style that matches and fits your trading personality, which is a critical step that is often overlooked when traders choose a trading strategy.
The best way to choose a trading style that matches your trading psychology is by actually testing trading ideas on an account with very low risk. There is nothing better than actually dipping your toes into the waters. With trading, this could be through a demo account at first, but eventually a low risk real account is preferred for better understanding of real market pressures.
So how do you that? Here are the necessary steps:
- You can open a separate demo account for all three trading styles.
- Then you can test all three styles for a week or two.
- Write down your ideas when you are trading:
- What's nice about this style?
- What are the disadvantages?
- What are the barriers to trading it and what are the solutions?
- After testing all 3 (or 2) of the styles, compare the notes on each of them.
- In case you are not sure, consult a trading friend for advice.
- Make a choice and test your style with a live account (if you are ready) whilst also practising proper risk management.
- Perform new evaluations and see how this style and strategy is working for you.
Try it out because it's actually a lot of fun to try out different styles. It's an eye opening experience, and will help you to recognise what you like and dislike.
Make sure to use these ideas explicitly via financial instruments, but only once you have completed a proper analysis of your own. This is a supportive method of analysing the charts. Always test these ideas first, on a Demo account, before applying them to your Live account. Another key tool is the MetaTrader Supreme Edition plugin, which offers 60+ extra features for your MetaTrader trading platform.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.