The Trading Style Guide: Scalping vs Day Trading vs Swing Trading
Knowing which trading style suits you best is a difficult question to answer, but the choice you make is not permanent. In fact, many novice traders will experiment with some or all of the various styles before settling on a method and strategy that suits their lifestyle and the funds they have to risk. Whichever applies to you, it's important to find out, as the trading style you choose will have a profound effect on your trading outcomes and your ultimate profitability.
This article will help you decide on the best trading style for you. 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.
What Is Scalping?
The first trading style of this guide is called "scalping". Scalping is a form of trading where traders (known as scalpers) aim to achieve profits from relatively small price changes. Scalpers attempt this by opening and closing large numbers of trades in one trading day, with the goal of catching many small wins.
Scalpers 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 are known to use higher levels of leverage.
The main goal of scalping is 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.
- Technical indicators also play an important role in a scalper’s strategy
Usually these indicators are split into two different groups: 'Momentum' and 'Support and Resistance' (S&R). Some examples of momentum indicators include: the Stochastic Oscillator, the MACD (Moving Average Convergence Divergence) indicator, and the 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 required criteria is to keep the win percentage and win sizes large enough to cover the losses when they occur.
The management of such trades usually requires considerable attention, but the burden can be reduced via pending orders, such as take profits, or by using a trailing stop loss. Admirals offers a wide range of trade management tools with its MetaTrader Supreme Edition plugin, which boosts the existing features of MetaTrader 4 & 5, and provides traders with tools such as the 'Mini Terminal' and the 'Trade Terminal'.
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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 three key aspects that day 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 trading 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 within 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 compared to scalpers, because their profit targets are larger.
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.
What Is Swing Trading?
The last trading style of our guide is called "swing trading", which is a style in which traders enter and exit sporadically, holding trades over a few days or weeks. Swing trading is a system whereby 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 not least because:
- Swing traders often use relatively lower levels of leverage, although this is certainly not a must, and is completely up to the trader in question.
- 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 content with holding out 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
Scalping vs Day Trading vs Swing Trading
Which Forex trading strategy is better? The answer to this question depends on you. The best trading style will vary from trader to trader depending on personality, skills and experience.
Scalping the Forex market takes skill; most experienced traders suggest it takes years of practice to develop the skills required to engage with financial markets using scalping techniques.
Although the learning curve as a swing trader and day trader is steep, it does not require the same experience and skills as scalping. Therefore, for beginner traders, day trading and swing trading are potentially the most credible options.
Indeed, although it is complicated to get precise figures on the percentage of traders in each trading category, it is a fair assumption that, based on broker data and anecdotal evidence, the majority of Forex traders do indeed fall within these two categories.
Below are some questions which you should ask yourself when deciding which trading style is best for you
- Which style do you feel most comfortable with?
- How much time do you have for entering, managing and exiting market positions? The more time you have, the more active you can be in the market. Swing traders can easily manage their positions while working a full-time job. The same cannot be said for day traders and scalpers.
- What are your trading goals? Do you want to become a full-time trader or are you just looking for a little extra income?
- What style of trading do you prefer? (Do you like fundamental analysis, technical analysis, pattern trading, price action, or indicators?)
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Frequently Asked Questions
Is Swing Trading Safer Than Day Trading?
Both trading styles are only as safe as the overall trading method used to control your risk. All the usual caveats apply; you need to avoid over-trading, you need to ensure your account is not under capitalised and you need to understand how margin and leverage can work in your favour.
Swing trading could arguably be said to be safer simply because you will make fewer trades than a day trader, however, it is inadvisable to enter into Forex trading under the allusion that any style of trading is “safer” than the other.
If you are a novice trader then concentrating on survival should be your primary instinct; you should ensure that your first small account stretches to its limit while you familiarise yourself with the industry and further your Forex trading education.
Are Day Traders or Swing Traders More Profitable?
Logic would suggest that the more trading opportunities you get, the more profitable you can be. Trade on one-hour time frames and you will probably make more transactions than trading off the daily timeframe. However, your risk versus reward rate typically reduces in line with the time frames you trade on.
Again, which overall trading style is more profitable relates to all the elements in your overall trading plan.
How Much Money Do You Need to Be a Swing Trader?
Your trading account requires different levels of funding depending on the style you choose. Scalpers are less likely to suffer margin calls and will risk fewer funds per trade. If you're looking to swing trade, you will probably require more funds in your account. Because you're more likely to stay in trades longer and you might need more margin to do this.
You can open a standard account with around one hundred of your domestic currency units with many credible brokers, but this might not be sufficient to employ longer-term trading techniques.
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 live account is preferable in order to better understand real market pressures.
So how do you do 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 do I like about this trading 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 and when you are ready), whilst also practicing 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 can be an eye opening experience and is the best way 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 trading account.
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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.