In-depth Analysis

Scalping vs Day Trading

Do you want to get into active trading, but you’re not sure of what trading style to adopt? Have you ever heard of scalping or day trading? In both trading styles, you need to be disciplined, patient, committed, and have a lot of time on your hands to analyze the markets in real-time and quickly react to opportunities according to your trading plan.

Let’s take a closer look at these two very popular short-term trading styles, so then you can decide which one best fits your trader personality.

Scalping – The most aggressive and fast-paced trading strategy

What is scalping?

Scalping is a trading style geared towards profiting from very small price changes in a financial asset, with trading positions held between a few seconds to a few minutes. Traders using scalping believe that it is easier to profit from very small price moves than larger ones.

What are the most used trading tools?

Scalpers are traders who use margin trading and leverage to exploit minor price changes through numerous trades in a single trading session/trading day, thanks to larger exposure. The goal is to accumulate very small profits that will hopefully turn into larger gains if they use an effective trading plan with strict entry/exit and money management rules.

Trading with a scalping strategy usually requires high leverage to monetize on small price changes. Leverage is indeed a great tool if it is wisely used, as it allows traders to increase the amount of trading capital they can trade with (compared to the amount in their balance), which in turn amplifies market movements, therefore increasing potential profit (or loss).

Check out our article How to choose the right leverage for your trading to learn more about leverage and margin.

Scalp traders usually rely on technical analysis, especially technical indicators like pivot points, moving averages, Relative Strength Index (RSI), and supports, resistance, and trendlines, as well as the order book and sometimes direct market access (DMA) accounts.

They will use very short-term charts like tick, 1-minute and 5-minutes charts from which they can directly trade with one-click trading options. Because they need to open and close trades very rapidly, being able to use market orders straight from their charts is essential for scalpers.

Which markets should you focus on?

Because scalpers only focus on very small price changes, they need to focus on highly liquid markets. They’re not necessarily looking for a highly volatile and trendy market, as they only need small price fluctuations. Forex and indices are quite popular markets

Scalpers also like to focus on moments with high levels of activity, like the opening/closing of trading sessions around the world and the overlap period between two trading sessions, especially between London and New York.

Advantages of scalping strategies

  • Scalping is the perfect trading style for making a quick profit
  • It is a great trading method for placing numerous trades a day and getting instant results
  • It can be a very lucrative trading strategy if an effective trading plan is used
  • Scalping allows traders to make money with only very small price movements
  • It is one of the most active and exciting forms of trading
  • There is little risk involved, as market exposure is very short
  • Scalping can be used to take advantage of rising or falling markets
  • Scalping doesn’t require a lot of trading capital
  • This trading technique doesn’t require planning ahead and researching opportunities in advance

Limits of scalping strategies

  • It is a very risky trading strategy, as it heavily relies on leverage
  • It can be quite difficult to forecast what markets will do on a second to second (or minute to minute) basis
  • You need to be right about the direction of the market and have good timing to be able to make profits with this technique
  • Scalping can be a very stressful and exhausting type of trading, which requires a high level of concentration
  • Because you’re making a high number of trades per day, trading fees can add up
  • This trading style requires a very fast Internet speed and a reliable broker that offers excellent order execution quality to get the best prices and rapid trade execution
  • Scalping isn’t allowed by every broker

Have a look at our article “How to best manage volatility and risk when trading” to get some tips about reducing your risks when trading.

Day Trading – An active intraday trading strategy

What is day trading?

Day trading is an active trading style that targets small price fluctuations in any asset by holding positions between a few minutes to a few hours. The most important aspect of this type of trading is to close every position before the end of the trading session or day. Day traders prefer to focus on very short-term price movements than longer ones to reduce market exposure risks and profit from intra-day small price changes.

What are the most used trading tools?

As scalpers, day traders usually use margin trading and leverage to be able to take advantage of larger market exposure. With this, they are able to trade several markets at the same time within a day with relatively limited trading capital.

Moreover, leverage trading through derivative products like CFD (Contract For Difference) allows long trading positions (to take advantage of bullish movements) and short trades (to take advantage of bearish movements).

Day traders usually use relatively small-time frames, but a bit longer than pure scalpers, like 15-minute charts, 30-minute charts, and hourly charts. They might also use longer timeframes to be able to determine the primary trend and the leading market sentiment (bullish, bearish or neutral).

Please read our article about Choosing the right time frame for your trading to learn more about the best ways to select the correct time frame for you.

Day traders mostly rely on technical analysis to decide when to enter and exit a trade. Continuation, reversal, and indecision chart patterns with Japanese candlestick charts are often used by traders.

Trend and momentum technical indicators are also part of a day trader’s arsenal, such as moving averages, Moving Average Convergence Divergence (MACD), RSI, Rate Of Change (ROC), Ichimoku, Stochastic oscillator, and Average Directional Index (ADX) among others.

Day traders also follow an economic calendar and market news to be aware of what’s going on in the markets and take advantage of opportunities that might arise with some assets.

Which markets should you focus on?

Day traders will focus on any market, as long as there is a price movement they can take advantage of during the day. Of course, liquid markets with a high level of market activity will always be a top choice for day traders, such as futures, Forex and shares. Still, assets like commodities, indices, and cryptocurrencies could also be a great pick depending on technical configurations or financial and market news.

Advantages of day trading strategies

  • Day trading is a great way to reduce overnight risk of holding a position from one day to another
  • As day trading is fast, you don’t have to overthink, and you will be able to see whether you’re right or wrong very quickly
  • It requires less time to make a profit, as you’re focusing on small price movements and you can reach your daily profit goal within a few trades
  • With leverage, you can use more trading capital than what you currently possess in your account and potentially increase your profit
  • Because you will mostly be using derivatives with day trading, you can profit from rising and falling markets
  • Automated strategies can easily be implemented with day trading

Limits of day trading strategies

  • It can be a risky strategy because of the risk of overleveraging your positions and high potential losses due to leverage
  • It is also often very addictive (risk of overtrading), as this trading technique gives you an adrenaline kick
  • Trading costs can add up if you’re making a large number of trades per day
  • It is a time-consuming trading style, as you need to be available to analyze the markets, decide what to buy/sell during your trading session and manage your positions

How to choose between scalping and day trading

The line that distinguishes a day trader from a scalper is a blurry one, as scalpers can be considered day traders and vice-versa. Still, there are a few differences that might help you choose the right trading strategy for you.

You might want to consider using a scalping strategy if…

  • you have a certain level of trading experience
  • your goal is to make very quick profits
  • you are available to take advantage of real-time and fast trading opportunities
  • you have a significant risk appetite
  • you are stress resilient
  • you are able to control your emotions
  • you are competitive in nature
  • you are able to focus on the markets for extended periods to analyze them and spot trading opportunities
  • you are able to react quickly
  • you are using a reliable broker with competitive trading fees and lightning-fast execution
  • you have a robust and reliable Internet connectivity
  • you are highly disciplined
  • you have a small amount of capital to start with
  • you perfectly understand what leverage and margin trading are

You might want to consider using a day trading strategy if…

  • you prefer to focus on intra-day opportunities
  • you like to have all your positions closed by the end of the trading day
  • you want to know your performance as soon as you’re done with your trading session
  • you are available to analyze the markets to sport the best intra-day trading opportunities
  • you are able to focus without distraction on different markets to spot promising, intra-day market opportunities
  • you know about technical and fundamental analysis
  • you have a small amount of capital and you understand how to use leverage and margin trading

Regardless of whether you decide to adopt a scalping or a day trading strategy, ActivTrades is a great broker to use for the following reasons:

  • there is no trading strategy restriction
  • it provides a secure and reliable trading environment with enhanced fund protection and insurance
  • it offers automated and direct order execution (non-dealing desk), as well as extremely fast execution with no re-quotes and low latency (average execution below 0.004 seconds), as well as deep liquidity from top-tier providers
  • it provides competitive conditions with tight spreads and no hidden fees
  • traders can access different reliable, professional, flexible, robust, and advanced trading platforms like MetaTrader 4, MetaTrader 5, and its proprietary platform ActivTrader, which is powered by TradingView with analytical tools and exclusive add-ons
  • traders can rely on a highly skilled client and support team which is available 24 hours a day from Monday to Friday in many different languages

 

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