Scalping vs. Swing Trading: What's the Difference?

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 that can range from a few seconds to months or even years.

The most popular trading strategies include day trading, swing trading, scalping, and position trading. Choosing a style that 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.

Key Takeaways

  • 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.
  • Scalping often requires a high degree of analytical capabilities, though traders do not need to have patience.
  • 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.
  • Swing traders may not need as much experience as scalpers, as swing trading is usually less demanding in terms of time needed to monitor financial charts.

Scalping

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. Scalpers go 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 charts, 5-minute charts. Scalpers may also use transaction-based tick charts. These charts are used to study price movement and take calls on certain trades.

Scalpers seek adequate liquidity for its compatibility with the frequency of trading. These traders need access to accurate data (quote system, live feed) as well as the ability to rapidly execute trades. 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 a trade as soon as it becomes profitable. Scalping is for those who can handle stress, make quick decisions, and act accordingly.

Your timeframe influences what trading style is best for you; scalpers make hundreds of trades per day and must stay glued to the markets, while swing traders make fewer trades and can check in less frequently.

Swing Trading

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 wherein 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 timeframe, 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 the 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 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 full-time 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. For this reason, it’s not for those who get anxious in such situations.

The table below gives a brief overview of the main differences between the two trading styles. 

  Scalp Trading Swing Trading
Holding Period A few seconds to minutes, never overnight A few days to weeks, even months at times; most commonly held for few days
Number of Trades Can be hundreds during a day A 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
Decision-Making Time Rapid Fluid
Strategy Extreme Moderate
Stress Level High Moderate
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

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.

FINRA Requirements

The Financial Industry Regulatory Authority (FINRA) sets forth trading requirements based on the level of investment activity an investor is engaged in. The two primary definitions relating to scalp trading and swing trading are day trades and pattern day trader.

A day trade occurs when a single security is bought and sold within a margin account on the same day. This applies to all types of securities including options, and cash accounts often limit day trades from occurring.

A pattern day trader is an investor who executes four or more day trades within five business days. The number of day trades performed must represent more than 6% of all trades within that account for any given full business week period.

These two rules often apply to scalp traders who seek to exit their positions before the end of the night. This is also applicable to scalp traders who perform high volumes of trades each day, likely overlapping a buy and sell order of the same security on the same day.

If a pattern day trader exceeds their daily buying power limit, they are subject to a day-trading margin call and will have up to five business days to meet the call requirements.

Should a scalp trader be flagged as a pattern day trader, the trader must maintain at least $25,000 in their margin account on any given day they trade. This equity requirement can be satisfied with either cash or securities. If the margin account value drops below $25,000, the trader is not permitted to trade until the minimum balance has been restored.

Pattern day traders also are not allowed to trade up to certain limits subject to their maintenance margin excess. A maintenance margin excess is the amount which the equity in their account exceeds the minimum amount of equity required. In general, the daily trade limit is often up to four times this maintenance margin excess.

Is Swing Trading Good for Beginners?

Swing trading is often considered better for beginners compared to scalp trading or day trading. Swing trading requires less skill and trading expertise. In addition, swing trading usually requires less time as it does not demand a trader be actively involved in scanning positions.

How Is Swing Trading Better Than Scalp Trading?

Swing trading has the benefit of usually being less expensive than scalp trading. Swing trading requires fewer orders, so traders will often incur fewer trading costs. Swing trading positions can also be formed over days, so a trader is often not required to continually monitor their positions.

Though success is not always guaranteed with swing trading, profit is often incurred over a smaller volume of trades. Therefore, swing traders can usually make a relatively similar amount of money to scalp traders yet require less activity and incur higher profit on each trade.

How Is Scalp Trading Better Than Swing Trading?

Scalp trading doesn't require much patience; an investor may turn around and sell a security within a minute of buying that security. Some traders find comfort in exiting out of all positions by the end of the day, and some traders may find this style of investing more exciting.

Because the profit margin on each trade is much smaller when scalp trading, scalpers are often protected by large losses incurred from a single trade or security. Whereas swing trading often employs a "go big or go home" mentality, scalp trading is comprised of hundreds of tiny transactions that may not snowball into larger losses as easily.

What Type of Trading Is Most Profitable?

Investors are often best suited to practice the style of trading that best suits their preference. Patient, inexperienced traders that are not interested in continually tracking stock charts are more likely to be successful swing trading. Meanwhile, investors that prefer quicker action, have larger amounts of capital to deploy, or have greater technical analysis abilities may be better suited to scalp.

Can I Swing Trade or Scalp Trade For a Living?

Yes, both styles of trading can be done full-time, and it is possible to make a living swing trading or scalp trading. Ensure you are familiar with FINRA regulations that dictate limitations on your margin account, equity requirements, and trading capacity.

Article Sources
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  1. FINRA. "Am I a Pattern Day Trader? Know the Day-Trading Margin Requirements."

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