Among
the many popular trading styles with both beginners and experienced traders are
scalping, which allows you to extract small portions of profit from each price
movement, and day trading, which aims to trade over a single day. In this
article, you will learn what scalping and day trading are and their differences
and peculiarities. Ultimately, you will learn what to look for to understand
which trading style is right for you.
Most
likely, you have already encountered such concepts as scalping and day trading.
Today, we will look at these trading styles in more detail.
A
trader’s earnings depend not on time but volatility (market price movements).
Depending on the amount of volatility a trader uses, there are two trading
styles:
● Day trading—positions are opened intraday, and the trader does
not leave the market without closing trades.
● Scalping—multiple trades within a short period. A scalper can
make up to 100 trades per hour.
The
main scalping and day trading criteria that determine the effectiveness of a
trading approach:
● Temperament. The riskiest traders make a lot of trading decisions within one
minute. Others may spend several hours on just one trade.
● Volatility timing. The prominent swings occur at a predetermined time, either at
the junction of trading sessions of different time zones or at the moment of
economic news release. In addition, each trading session has its unique style
of price changes.
● Liquidity. The more often a transaction is made on the currency market, the
more commissions a trader pays. The commissions are minimal precisely because
of excessive liquidity on super liquid instruments such as EURUSD, USDJPY,
GOLD, and BTC.
Let’s
look closer at these two trading styles and try to understand the differences
between scalping and day trading and the profit and risk levels.
What is scalping?
Scalping
is a modern style of trading which involves extracting profit from small price
movements within numerous transactions. A distinctive feature is the high
intensity of transactions. An aggressive scalper can open dozens and even
hundreds of positions per day. Targets are small, from a few pips to several
points. Almost all positions are closed during the day. Timeframes up to M15
are used; most often, M1–M5.
This
trading style is most widespread among players in the Forex market, which is
the most liquid round-the-clock marketplace. Here, the rules of classic
scalping were invented, which involve trading on all micro-movements that
exceed double spread and commission costs, exiting a position at the slightest
trend reversal, and the habit of closing all positions overnight to lock in
profits at the end of the day. Closing positions overnight ensures protection
from the morning gap and allows sleeping well at night without considering the
results of night trading.
Speed
is another essential factor for scalpers, no less critical than liquidity, so
the choice of broker is crucial. A scalper constantly analyses price charts and
makes decisions based on this data, so the broker must provide quick access to
the information necessary for analysis: prices, news, charts of foreign
indices, signals, statistics, etc. As a consequence, fast scalping trades
require an intermediary with an unloaded server so that, at the right moment,
your request does not wait for a few crucial seconds for its turn.
What is Day Trading?
Day
trading is speculative trading on the stock exchange during the trading day
without carrying over open positions to the next day. Traders use only intraday
operations, where the trade duration usually ranges from a couple of minutes to
several hours. Trades are also rarely carried over to the next day.
Most
often, a combination of different timeframes is used. It can be, for example,
M1 and M15, M5 and M30. Trade entries become more accurate in Day trading, and
the Risk Reward Ratio improves. The intensity of trading is much lower compared
to scalping. A day trader usually opens trades at the beginning of the trading
day and closes them when the trading session ends. He in no way carries open
positions through the night.
Some
day traders trade only on the trend (this style is best suited for
inexperienced traders). In contrast, others trade in a range in both
directions, using price fluctuations in the channel between support and
resistance levels for profit. Highly skilled and completely inexperienced
traders also play against the market (counter-trend trading). While experienced
market participants can profit from such high-risk trading, novice traders can
lose their entire deposit.
How to choose?
Two
key parameters to consider when choosing—your temperament and the availability
of free time—affect the ability to follow the market.
Choleric/sanguine
people make excellent scalpers, as scalping methods imply a good reaction to
the appearance of a signal and quick fixation of profits. People with this
temperament are not characterised by patience and diligence, so an abundance of
quick trades is needed.
More
calm people scalping will seem too aggressive. The need to react quickly to
changing market conditions will cause discomfort. Intraday trading is more
suitable for phlegmatic/melancholic people. There are far fewer deals; there is
time to decide, and positions are kept open longer. From a trading psychology
perspective, it is also important that the profit in each trade is more
significant. A trader working in intraday style does not wake up at 5 a.m.
thinking he has missed all the entry points. On the contrary, the schedule is
built so that they have time to sleep, not to be in a hurry, and to balance
trading and their personal lives.
Conclusion
Scalping
and day trading is a question that concerns most novice traders. These are some
of the most popular trading styles, which, on the one hand, have their
advantages and disadvantages, and on the other hand, when honed in practice,
can bring significant gains in both the short and long term. Every trader is an
individual in his interests in the market, and in pursuit of his goals, he can
try different trading styles and strategies and decide which one suits him
best.
About
Octa
Octa
is an international broker that has been providing online trading services
worldwide since 2011. It offers commission-free access to financial markets and
various services already utilised by clients from 180 countries with more than
42 million trading accounts. Free educational webinars, articles, and
analytical tools they provide help clients reach their investment goals.
The company is involved in a comprehensive network of
charitable and humanitarian initiatives, including the improvement of
educational infrastructure and short-notice relief projects supporting local
communities.
Octa has also won more than 60 awards since its
foundation, including the ‘Best Educational Broker 2023’ award from Global
Forex Awards and the ‘Best Global Broker Asia 2022’ award from International
Business Magazine.