People are different. They have varying tastes, styles, personalities and preferences. The same can be said for traders. And the traders’ unique characteristics will lead to trading differently from one another. Some traders may be more aggressive, whilst others are more risk averse. Some may have more time to dedicate to the markets, while others’ lifestyle dictates the opposite. Some like taking a look at the larger picture, whilst others want to see the result of their analysis as quickly as possible. Some are obsessed on high win rates whilst others are fine with having more losing trades as long as the wins are larger. The point is that no two traders are the same. For this reason, we often speak of different trading styles – namely scalping, day trading, swing trading and position trading. No style is particularly better than the other and all can be used profitably. However, all styles hold particular pros and cons that resonate differently according to differing traders’ personalities and circumstances. We shall take a more in-depth view of these styles below.
Scalping
Scalp trading, or scalping, is a fast-paced trading style characterised by very short time periods between the opening and closing of a trade – sometimes for only a few seconds or short minutes. Here, the main aim of the scalper is to open and close various trades and catch a very large number of small wins throughout the busiest times of the day (“scalping” lots of small profits from a significant amount of trades per day). The goal here is to gain the most amount of profit possible from small price changes within the shortest timeframe possible. All positions are closed at the end of the trading day.
Even in relatively calm markets, small moves happen more frequently than large ones and scalpers try to capitalise on such quick movements. By mainly focusing on technical analysis to determine their bias (to buy or sell), scalpers often use the 1-minute or 5-minute timeframes to execute entries and exits. It is indeed the limited time exposure to the market which actually reduces the scalper’s risk – the less time a trade is in play, the less likely it is to lose a large amount of money.
Being successful at scalping requires a significant amount of skill and concentration as scalpers basically need to be glued to the charts for long periods of time whilst maintaining sniper focus. Scalpers also require speed and quick decision-making abilities. They need to be quick in pressing the buy or sell buttons and be ready to change their mind quickly if the opportunity arises in the opposite direction.
Scalping systems are heavily dependent on market volatility and are normally characterized by high win percentages and low reward to risk ratios. Scalp traders typically rely on relatively larger position sizes and higher leverage for gains to have any financial significance, considering the small percentage reward and short time in play.
Due to the significant number of trades taken and relatively small winning amounts, scalpers need to consider that their profits must at least cover the broker spreads and other trading costs – which will be significant considering the relatively large number of transactions.
Since scalpers need to constantly monitor the markets, it is best suited for those traders who have a lot of time on their hands – spending several hours in front of the charts at a go. Also, due to the relatively stressful and fast-paced nature of scalping, it is a style more fitting to cool and calm individuals who are less likely to panic when things aren’t going in their favour and those who know how to handle stress and pressure.
Day Trading
In essence, day trading involves the opening and closing of positions within a given trading day. Although similar to scalping due to its very short-term view and because trades are open and closed in the same day, day trading is different because it requires far less set ups. This is so, because day traders often use the 30-minute or hourly timeframes which would result in fewer entry or exit triggers than the lower timeframes used by scalpers. And whilst scalpers are known to take tens or even hundreds of trades in a day, day traders are usually limited to one or up to two trades.
Day traders are known to hold onto trades for several hours but never overnight. They would typically pick a position (to buy or sell a currency pair) at the beginning of the day with the aim of closing by the end of the day at a profit or a loss.
Similar to scalpers, day traders usually rely heavily on technical analysis but may also take positions according to fundamentals – in light of recent news publications or in anticipation of a particular data release expected on the day (for example, a day trader may buy or sell the dollar in anticipation of the weekly US unemployment claims release in the following hours). Day traders also use leverage but this tends to be lower than that used by scalpers as profit targets are larger and therefore there is lower requirement for risk.
Day trading is more suitable for those traders who may see scalping as too fast or requiring too much concentration and effort but still prefer taking a relatively short term view of the forex markets – knowing whether they were right or wrong by the end of the day. That said, day traders still need to put in significant time and effort in order to analyse and monitor their existing trades.
Swing Trading
Swing trading is characterised by intermediate-term trading executed by forex traders who typically hold on to trades for several days up to several weeks at a time. Swing traders would therefore require patience to hold on to trades longer and often employ both technical and fundamental analysis to determine whether or not a particular currency pair will go up or down in price within the relative near future.
Whereas a tight stop-loss is better suited for scalps and day trading, a wider stop-loss tends to work best for swing trading as a trade has more time to move in the trader’s favour before the stop is hit. This is in part due to the fact that, unlike scalping or day trading, swing trades usually have much larger profit targets. Whilst scalpers and day traders would target smaller profit targets (a few pips in the case of scalping to tens of pips in the case of day trading), swing traders often target to make up to hundreds of pips in profit. And since trades normally have larger targets, broker spreads will not have as much of an impact on profits, as in the case of scalps or day trades.
As swing traders have larger profit targets and wider stops, they tend to use larger timeframes to make entry and exit decisions – usually 4-hour timeframes and upwards (the daily or even weekly). Swing traders often use relatively lower levels of leverage when compared to scalpers or day traders.
Swing trading is typically suited to forex traders who cannot necessarily observe the charts throughout the entire day but have enough time to dedicate to analyse the markets and monitor existing trades daily. As intraday traders get frequent entry signals, swing traders are subject to waiting longer for good trading opportunities to occur. This requires patience to know when to pull the trigger, rather than feeling rushed into taking trades when the setup is just not attractive enough compared to the swing trader’s goals. Also, in effect, holding positions for longer may run the risk of greater losses unless risk is managed appropriately (albeit the wider stop-losses).
Position trading
Position trading is the longest-term trading in which a trader may hold his/her position for several months – possibly years. It is the type of forex trading which most resembles long-term investing. The difference is that long-term investing usually entails BUYING a stake in a company, an asset (such as gold or silver), commodity (such as wheat or coffee) or an index or fund (such as the S & P 500) with the hope that price appreciates in value for you to make a profit. However, in position trading, apart from buying, a trader may also decide to short (SELL) a currency pair with the view that it will depreciate in value over time, with the aim of making money at the expense of its downfall.
In order to do so, position traders primarily focus on fundamental analysis in order to base their trade decisions. What will make a currency stronger or weaker compared to its currency counterpart (ex: the pound to the dollar in the case of GBP/USD or the New Zealand dollar to the Canadian dollar in the case of NZD/CAD)? Position traders would typically consider the long-term effect of factors such as GDP-growth/decline, job creation, political stability or unrest, standard of living and other issues on the long-term prospects of a particular currency’s strength or weakness. However, when deciding to take technical analysis into consideration, position traders would look at very high timeframes such as the weekly or monthly timeframes.
In order to succeed at position trading, traders need to be patient and have full belief in their bias. Position traders are likely to experience huge swings in favour or against their position but would need to hold on in accordance to their analysis. Profit targets are typically very large – often several hundreds of pips or more – but will need to take a long period to materialise. Conversely, stop-losses also need to be quite significant. For this reason, position traders must understand the importance of being sufficiently capitalised and not to use excess leverage which can ultimately spell disaster.
The forex market, like all other markets, is subject to various ebbs and flows. Position traders are often independent thinkers who require nerves of steel to handle the pressure of seeing their trade inevitably move against them at times, whilst still holding the belief in their long-term analysis – sometimes against the opinion of the majority of the players in the market in the short-term.
Recap
| Scalping | Day Trading | Swing Trading | Position Trading | |
| Holding Period | A few seconds or minutes. | Usually hours throughout the day. Never overnight. | Several days or weeks. | Several months. Even years. |
| Number of trades | Various trades per day. | Often one or two a day. | One trade per currency pair. | One trade per currency pair. |
| Charts | Usually 1-5 minute charts. | Usually 30-minute or hourly chart. | 4-hour or daily chart. | Usually weekly or monthly chart. |
| Decision-making time | Rapid. | Fluid. | Fluid. | Slow. |
| Stress-level | High. | High but less than scalping. | Moderate. | Moderate. |
| Profit Target | Small. A few pips multiple times daily. | Usually tens of pips in a given day. | High. Usually hundreds of pips. | Very high. Several hundreds of pips or more. |
| Time Needed | Typically several hours a day. | Some time for analysis, monitoring, opening and closing positions per day. | Limited time needed for analysis and monitoring positions. | Very little. |
So, which forex trading style is the best? The answer ultimately depends on the individual trader and his/her unique personality, skill, experience and personal circumstances. What are the trader’s goals? Is s/he new to forex, just looking to learn and make some extra income or looking to make this a full-time thing? Does the trader prefer short-term validation of his/her analysis or prefer to look at things from a more macro perspective? Does the trader have enough time to consider scalping or day trading or do life circumstances dictate a more background approach for swing and position trades? What’s the trader’s character like? Is s/he calm, impatient, thrill seeking or risk averse? What aspects of trading does s/he prefer – Fundamental analysis? Technical analysis? Using indicators? Price action? Etc…
All these are important factors traders need to bear in mind when considering what type of trader they wish to be. All trading styles have their own benefits and shortcomings and there isn’t necessarily a right or wrong way to trade, so long as it is profitable and fits the individual’s goals and personality.