There are several forex trading and investing approaches. Some people specialize in long-term investing, where they identify themes and allocate capital for long-term gains. There are other traders who focus on very short timeframes. In this article, we will look at two popular approaches known as scalping and swing trading and identify how they work. We will also look at the better option between the two.
What is scalping?
Scalping is a forex trading approach where traders focus on the micro short term. In it, they aim to buy and sell currency pairs within a very few minutes. Their goal is simple – Identify a small trend or reversal, enter a trade, make some cash, and then exit. Scalping is a type of day trading in that traders never leave their trades open overnight.
How scalping works
Scalping works in a quite simple way. For one, unlike other trading strategies, traders use extremely short timeframes to analyze their trades. Most often, scalpers use timeframes that are less than 5 minutes. With these, they can identify extremely short-term setups.
Scalpers use several approaches to find the opening and closing levels. For example, some use technical indicators like the volume-weighted average price (VWAP) or Moving Average to identify when to enter and exit a position. For example, when using VWAP, these traders commit to buying whenever the price moves above the indicator.
Other scalpers use candlestick and chart patterns. Some of the popular candlestick patterns are doji, bullish and bearish engulfing, and harami. Whenever they see these patterns, they are sure that a reversal will start. They then open trade and ride the reversal for a while.
The most common chart patterns used by scalpers are triangles, rising and falling wedges, and head and shoulders patterns. Others are bullish and bearish flags and pennants.
Scalpers also use trend-following strategies. This is a situation where they identify a trend and attempt to open positions in its direction.
What is swing trading?
Swing trading is different from scalping. While swing traders focus on extremely short-term trades, swing traders have a relatively long-term horizon. They are not interested in making small profits and exiting their trades. Swing traders focus on opening and closing trades within a few days.
For example, if the EURUSD pair is trading at 1.1200 on a Monday morning, they can open a bullish trade if they believe that it will rise to 1.1350 by Thursday.
How swing trading works
Swing traders use a different approach to make decisions in the market. The most important difference between them and scalpers is that they incorporate fundamental analysis into their trading.
Fundamental analysis refers to a market analysis method that focuses on news and economic data. In it, traders attempt to predict the future direction of an asset by looking at the prevailing data in the market.
A good example of this is when there is a Federal Reserve interest rate decision. In this, there are three main theses that you can work with when you are looking at the EURUSD. First, you can predict that the pair will not have meaningful changes when the decision happens. Besides, the Fed has embraced the concept of forward guidance in the past few months.
Second, you can predict that the Fed will embrace a hawkish tone, which will drag the EURUSD lower. Therefore, on Monday, you can decide to “short” the pair hoping that it will decline.
Third, you can predict that the Fed will have a dovish tone, which will push the pair higher. As a result, you could buy the EURUSD pair.
In addition to fundamental analysis, swing traders also incorporate technical analysis in their strategies. For example, if they spot a bullish flag pattern, they can buy a pair and hope that the price will have a bullish breakout.
Swing trading vs. scalping
So, which is better between swing trading and scalping? To be fair, this is a relatively controversial topic since people on both sides view each other differently. Scalpers believe that their approach is better than swing traders and vice versa.
There are some benefits of scalping. First, unlike swing trading, it does not have significant overnight risks. These are risks that emerge when you leave a trade running overnight. For example, a major event can happen when you are asleep. This, in turn, can lead to substantial losses. Still, these risks can be mitigated using stop-loss and a take-profit.
Second, scalpers don’t experience some costs that swing traders do. The most common cost associated with trading is known as a swap. This is often a small cost that brokers charge trades that are left overnight. Since they don’t leave these trades open in the overnight session, they don’t incur these risks.
Third, scalpers benefit from the fact that they react to changes in a short period. For example, if the EURUSD has been in a consolidation mode and then makes a bullish breakout, they can easily enter a trade and make money.
One of the risks that emerge with scalping is that it involves over-trading. As mentioned, scalpers open tens of trades per day and make small profits. For things to add up, they need to open multiple trades per day.
Swing trading has its benefits. It can be done by people who have full-time jobs. Besides, you only need to open a few trades per week. Also, the profit potential in swing trading can be enormous if your thesis is right.
Swing trading and scalping are two of the most popular trading approaches in the market today. In this article, we have looked at how the two strategies work and how you can use the approach well. Also, we have looked at the pros and cons of the two strategies.