Scalping vs. Swing Trading: An Overview
Many participate in the stock markets, some as investors, others as traders. Investing is executed with a long-term view in mind--years or even decades. Trading, meanwhile, moves to pocket gains on a regular basis.
A common method for distinguishing one type of trader from another is the time period for which a trader holds a stock—a variance which can range from a few seconds to months or even years.
Among the most popular trading strategies are day trading, swing trading, scalping and position trading. Choosing a style which suits your own trading temperament is essential for long-term success. This article lays out the differences between a scalping strategy and a swing trading strategy.
Scalping strategy targets minor changes in intra-day stock price movement, frequently entering and exiting throughout the trading session, to build profits.
Often classified as a subtype of the day trading technique, scalping involves multiple trades of very short holding periods from a few seconds to minutes. Since positions are held for such short periods, gains on any particular trade (or profits per trade) are small; as a result, scalpers carry out numerous trades—into the hundreds during an average trading day—to build profit. Limited time exposure to the market reduces scalper risk.
Scalpers are quick, seldom espousing any particular pattern. Going short in one trade then long in the next, small opportunities are their targets. Commonly working around the bid-ask spread—buying on the bid and selling at ask—scalpers exploit the spread for profit. Such opportunities to successfully exploit are more common than large moves, as even fairly still markets witness minor movements.
Scalpers usually follow short period charts such as 1-minute, 5-minute charts, or even transactions-based tick charts, to study price movement of and take calls on certain trades.
Scalpers seek adequate liquidity for its compatibility with the frequency of trading. Access to accurate data (quote system, live feed) as well as the ability to rapidly execute trades is a necessity for these traders. High commissions tend to reduce profit with frequent buying and selling, as they increase costs of performing trades, so direct-broker access is generally preferred.
Scalping is best suited for those who can devote time to the markets, stay focused and act swiftly. It’s usually said that impatient people make good scalpers as they tend to exit from a trade as soon as it becomes profitable. Scalping is for those who can handle stress, make quick decisions and act accordingly.
Your time frame influences what trading style is best for you; scalpers make hundreds of trades per day and must stay glued to the markets, swing traders make fewer trades and can check in less frequently.
The strategy of swing trading involves identifying the trend, then playing within it. For example, swing traders would usually pick a strongly-trending stock after a correction or consolidation and just before it’s ready to rise again, they would exit after pocketing some profit. Such buying and selling methods are repeated to reap gains.
In cases where stocks fall through support, traders move to the other side, going short. Typically, swing traders are “trend followers,” if there is an uptrend, they go long and if the overall trend is towards the downside, they could go short. Swing trades remain open from a few days to a few weeks (near-term)—sometimes even to months (intermediate-term), but typically lasting only a few days.
In terms of time frame, patience required and potential returns, swing trading falls between day trading and trend trading. Swing traders use technical analysis and charts which display price actions, helping them locate best points of entry and exit for profitable trades. These traders study resistance and support, using Fibonacci extensions occasionally combined with other patterns and technical indicators. Some amount of volatility is healthy for swing trading, as it gives rise to opportunities.
Swing traders maintain vigilance for a potential of greater gains by indulging in fewer stocks, helping to keep brokerage fees low.
The strategy works well for those unable to stay glued fulltime to the markets, keeping a minute by minute track of things. Part-time traders who take time to peek at what’s happening during work intervals often opt for this strategy. Pre-market and post-market reviews are crucial to successful swing trading, as is patience with overnight holdings—therefore it’s not for those who get anxious in such situations.
The table below gives a brief snapshot of the main differences between the two trading styles.
|Scalp Trading||Swing Trading|
|Holding Period||Few seconds to minutes, never overnight||Few days to weeks, even months at times. Most commonly held for few days|
|Number of Trades||Can be hundreds during a day||Few|
|Chart||Tick chart or 1-5 minute charts||Daily or weekly charts|
|Trader Traits||Vigilance, impatience work well here||Greater patience and precision required to understand trends|
|Profit Target||Small, multiple||Few but large|
|Tracking||Constant monitoring throughout the trading session||Reasonable monitoring; requires up-to-date info on news and corporate events|
|Suitability||Not for novice traders||Suitable for all, from beginners to moderate and advanced players|
The Bottom Line
Each trading style comes with its own set of risks and rewards. No single 'perfect strategy' exists to suit all traders, making it best to choose a trading strategy based on your skill, temperament, the amount of time you're able to dedicate; your account size, experience with trading and personal risk tolerance.
- Scalping and swing trading are two of the more popular short-term investing strategies employed by traders.
- Scalping involves making hundreds of trades daily in which positions are held very briefly, sometimes just seconds; as such, profits are small, but the risk is also reduced.
- Swing trading uses technical analysis and charts to follow and profit off trends in stocks; the time frame is intermediate-term, often a few days to a few weeks.