In much of the trading literature online, there is usually a theme that day trading and scalping are a ‘fool’s game.’ These are bold claims that need observation.
Although both day trading and scalping are technically different, they both share similar qualities of high-frequency trading, ample amounts of daily screen time, and analyzing lower time-frames.
Scalping refers to taking advantage of tiny price fluctuations where the trader executes positions frequently. This action results in small profits that can add up quickly to sizable amounts, which is the main attraction.
A scalper needs to analyze very low time-frames (typically the 1-minute or 5-minute, 15-minute at the max), quick thinking, intense concentration, and lots of screen time.
Day trading, as the word suggests, refers to an approach where positions are closed before the end of the trading day. The qualities needed for scalping are less magnified because a day trader usually observes the 15-minute to 1-hour time-frame, though they still need fairly large amounts of time on the charts nonetheless.
If we know what each of these methodologies requires from someone, why is there a recurring theme in the industry that both approaches are detrimental to a trader’s success?
The general industry perception
Perhaps the biggest reason why day trading and scalping are frowned upon in forex is the general industry perception that has existed for many years. Unfortunately, much of the marketing around trading is geared towards realizing quick gains with little effort, knowledge, and an almost reckless, risk-heavy approach.
We see this portrayal in much of the media, a flashy lifestyle of material possessions associated with making fast money. Understandably, the only way to achieve this is by scalping or day trading, which is far easier to promote than telling people to swing trade or be patient every time.
Another point worth mentioning is countless people who’ve never traded before may believe any financial market can replace a 9-to-5 job. No one can guarantee any consistent income because no strategy can profit on all occasions.
Thus, the realities of forex are entirely different from these perceptions.
Time cost and concentration
Both a scalper and a day trader require exceptional concentration. One needs to make quick decisions regularly because of the high trade frequency.
It isn’t to say this isn’t possible, but consistently doing it usually results in several missed opportunities and money management mistakes like not using stops or incorrect position sizing.
Due to the amount of work involved, time consumption is the biggest enemy. The trader needs to sit through all trading sessions, ultimately causing fatigue and other issues related to physical health.
Time-frame reference
In forex, depending on the trading platform, there are at least nine time-frames. As one goes further down, the faster the markets appear, and there is a lot more data to analyze.
Scalpers and day traders typically operate on the low end (1-minute, 5-minute, and 15-minute time-frames), which market analysts refer to as ‘noise’ since there can be countless false signals.
The point of reference on a quicker time-frame makes the market more erratic. Another issue is the exposure to moments of high-volatility that are more visible with these charts. For example, a market could gap ten pips (which is uncommon) on an ordinary day, which easily reflects on a shorter time-frame.
Compared to a higher time-frame, this event is barely noticeable because, on charts like the 1M and 5M, one deals with random fluctuations of the markets. It’s not to say that an experienced trader cannot trade this way, but it’s very challenging, and there are risks of burnout.
Risk to reward
Day traders and scalpers have to take small wins constantly, and on many occasions, the rewards are considerably smaller than what they’ve risked. For example, they may risk 50 pips only to make 5. While these profits do add up over time, it means one cannot hold positions for long enough to realize more prolonged rewards.
Also, with a skewed risk to reward ratio like this, it is more challenging to deal with a drawdown because one loss can be noticeably larger than a string of winning trades.
Transaction costs
Considering that trading is a business, there are always expenses involved. Fortunately, although forex is one of the low-cost financial markets, it doesn’t mean traders should overlook the fees, especially with a higher frequency of positions.
There are two sides to this argument. Firstly, as we’ve established, most day traders and scalpers rely on small rewards. They are often compelled to trade more to cover the spread. For instance, if they aim for ten pips on each position and the spread, on average, is five pips, that is half their profits.
Let’s assume they take 100 trades in a month. If the average were five pips, that would be 500 pips in fees. Furthermore, trading frequently also exposes one to slippage or other instances of spread widening.
Conclusion
Any forex trader aims to look for opportunities offering the best reward with minimal time spent and risk. Although day trading and scalping do provide a multitude of trading opportunities regularly, what matters more is the quality of these moments.
While swing or long-term traders may sometimes lack the opportunity cost of not being involved regularly in the markets, they have more time and don’t need many set-ups to be profitable at the end of the year.
Day trading and scalping are not impossible, though traders need to be aware of the many drawbacks (the transaction costs, the concentration required, the time spent, etc.), which make it a hard-to-sustain trading approach long-term.