Scalper, Swing or Day Trader? Discover your Trading Style

Although technical analysis and patterns usually should work mostly the same on any time frame, the choice of a personal trading style is a very important step, as its compatibility with your own personality and time availability will have a strong incidence on your potential for success. There are three main time-related styles: Intraday or Day Trading (where we also find an extremely short-term trading called “scalping”), Medium Term or Swing Trading and Long Term, or Position Trading. Examining each of them in further detail will hopefully help you to choose the most appropriate method and then build your strategy upon.

SCALPING

This is the fastest, shortest and more aggressive trading method. Scalpers usually open a great number of positions during the day, that only last for a few minutes or even seconds. Their goal is to buy or sell quickly and profit from very small price differences, often taking extremely small profits that can range between 1 and 10 pips, and using the shortest time frames: 5 minutes, 1 minute or even 5 and 10 second charts, on the platforms that offer those. As the profit they make in pips per each transaction is minimal, scalpers use a very high leverage so the results of their trades can have enough significance. The high liquidity of the Forex market allows this type of execution (although is it somewhat frowned upon by some market makers) and it needs to be performed on trading platforms which offer a high speed and direct order execution.

The risks are smaller as well, as positions are exited swiftly and with small losses in pips, but it is not as simple as it would seem, because the effect of leverage inflates those losses and could give big drawdowns in the case of a losing streak, because of the high frequency trading and overall daily amount of transactions needed for this method to be profitable.

Scalping is the trading style which requires the greater amount of time, as given the fast decision and execution times the trader needs to be present all the time in front of the charts to monitor the ongoing trades. One of the main rules of risk management on this method is that positions have to be closed quickly if the market goes against the chosen direction. It doesn’t matter if later on the market comes back, exits are executed because the loss in pips has to be very limited.

DAY TRADING

Day trading, also known as Intraday, is similar to scalping in that the goal is to perform several transactions during a single day time span, and profit from small movements either if price is falling or rising, aiming to realize a greater amount of winning trades with a good risk to reward ratio, which will allow to minimize the losses on failed transactions. All positions are usually closed at the end of the trading day. In this way, the trader will not be exposed to the risks of holding a position overnight or having an opening gap after the week-end pause. Every day your liquidity is totally available.

Same as for scalping, the profits will be somewhat limited, being usually around one-third or even half of the daily range depending on the currency pair that is traded. In this trading method, it is very important to set specific targets and stop-losses and respect them all the time. Day trading is best employed in volatile markets, so you can benefit from the fast movements of the prices.

The most commonly used time frames for day trading range from 15 minutes to 1 hour. The key here is technical analysis and although you should be using fixed stops and limits, it is better to monitor the trades closely. Higher timeframes of the day trading range will allow some pausing between candle closes, thus this style is a little less stressful than scalping.

SWING TRADING

The “swing” is the movement of prices in the market that occur between a low and a high. A swing low means the prices are falling while a swing high indicate a move to the upside. This style is based on the trend, where you would open a trade at or near the lows (bottoms) if the trend is bearish and at or near the highs (tops) when the trend is bullish, and then exit the position as soon as the move seems to be losing its impulse, usually making a retracement, also called correction, or a full reversal to a new trend on the opposite direction. On this method, the traders go along with the main trend but aim to avoid the corrective moves thus closing when it occurs, and re-opening a new trade in the original direction after the retracement, if the trend is still valid.

This method allows to maximize the performance while avoiding the risk of losing profits made when there is a turn back. However, it is very difficult to identify the exact points where the market will turn. Swing traders buy on dips and sell on rallies, and this style can sometimes be considered as "contrarian" if we watch the moves on smaller time frames. The trend has to be carefully identified, and technical signs understood so to be able to get out of the position at the right time. An ideal scene would be to exit just before the turning point or reversal point, and there is no particular time limit as long as the swing keeps its direction, however this can be considered a medium term style and most common time frames are 1 hour, 4 hours and daily charts. A swing trader can use different of those time frames and trade “trends inside trends” depending on the amount of time available to dedicate to monitoring and adjusting the stop-losses. Target limits are not commonly set, as the exit is defined by the signals given through price action when a probable turning point is seen on the charts. Swing traders move their stops periodically to protect their previous profits, or use trailing stops at a convenient distance to allow the trade to breathe while reducing the risks.

POSITION TRADING

This longer term style is quite similar to Swing trading in that it follows the trend, there is no limit on the duration of the trade and stops are periodically adjusted, however the difference is that the position is held during the retracements and minor reversals, as long as there is an expectation for the trend to continue its direction. The time frames used for the analysis of the main trend are much higher, like Weekly or Monthly charts. These trades can be opened and held for several months or longer, and need little time and maintenance.

In the next article we will be examining in further detail all the pros and cons for each one of the above trading methods.