Scalping vs Swing Trading

Looking to get into online trading, but not sure which strategy is the best fit for your skill set and financial goals?

In this guide, I compare scalping vs swing trading so that you can make an informed decision when selecting a suitable strategy to suit your trading style.

Also Consider: My guide to the best forex brokers May 2023

What is scalp trading?

Starting with scalping or scalp trading, this is a very short-term-minded strategy that aims to make ultra-small profits. Whether it’s forex, stocks, or any other liquid marketplace, scalping positions will remain in place for no more than a few minutes.

Scalp traders need to be at their devices for considerable periods of time, with the view of capitalizing from small pricing movements.

• For instance, let’s suppose that you are scalping forex.
• You decide to focus on GBP/USD and have found a suitable entry point at 1.2101
• You believe that in the next few minutes, GBP/USD will increase to 1.2110 – a price movement to the upside of just 9 pips.
• Your speculation is correct and the scalping position is closed at 1.2110

As the above example highlights, scalping profit margins are wafer-thin. Crucially, a 9-pip movement on GBP/USD from 1.2101 to 1.2110 represents a real-term margin of just over 0.07%.

This means that for every $100 staked, a profit of just 7 cents will be realized. This is without taking into account trading fees.

In order to make scalping more profitable, experienced traders will typically apply high levels of leverage within their trading strategies.

In the US, for example, major forex pairs can be traded with leverage of up to 1:50. This means that for every $100 staked, scalp traders can trade major pairs with capital of up to $5,000.

On the one hand, leverage is a high-risk trading strategy to adopt as a newbie scalper, as both profits and losses will be amplified.

However, unless you have a sufficient amount of capital, scalping without leverage can make the process counterintuitive.

After all, you will need to dedicate a considerable amount of time to scalping, as in-depth technical analysis is required to make informed trading decisions so may not suit novice traders.

What is swing trading?

Just like scalping, swing trading is a short-term strategy that can be deployed in a number of financial markets, especially forex and stocks. However, swing traders will keep positions open for a longer period of time, maybe a few days.

For instance, I mentioned above that scalpers rarely keep positions open for more than a few minutes but, in the case of swing trading, this can be a few days or weeks.

• From the perspective of novice traders, swing trades not only offer greater flexibility, but considerably more time to make investment-related decisions.
• In other words, as a swing trader you will not be required to quickly enter and exit a trade over the course of a few minutes – which will be intimidating for a complete newbie.

Another reason why I find that swing trading is a more beginner-friendly strategy is that you will have more time to research potential trades and make fewer trades which may suit your trading style better.

Many swing traders use a combination of both technical indicators and fundamental analysis.

• Technical indicators like the RSI, MACD, and SMA are particularly common in this regard.
• So if you are going to focus on swing trading strategies, it’s a good idea to learn how these core indicators work and how they will enable you to spot potential opportunities.

In terms of fundamental research, swing traders will evaluate key news developments throughout the day. This is with the view of assessing whether a development could impact the future value of an asset and thus – provide inspiration for a successful swing trading position.

Ultimately, irrespective of whether you are using technical indicators or fundamental data, the overarching objective of swing trading is to look for potential trends. This might be a new trend that could be about to start or an exciting one that is already in place.

What swing traders aim for is profitable trades over a few days or other very short holding periods to take advantage of price movements and the general market trend, depending on your trading style.

Capital requirements when scalping and swing trading

This will, of course, need to be within your respective trading budget.

Below, I dive a little bit deeper into the capital requirements across both scalping and swing trading.

How much money do you need to be a scalper?

To make a scalping strategy worthwhile, you will likely need to have access to a considerable amount of trading capital.

To reiterate, this is because of the types of margins that you will be looking to target.

• For example, irrespective of whether you are trading majors, minors, or exotics – currency pairs will only move by a modest number of pips within a 5-8 minute period, which is the average scalping timeframe.
• This is also the case with stocks, regardless of whether you are trading large, medium, or small-caps.

If you do not have access to many thousands of dollars to make scalping financially viable, then the only other option is to consider trading with leverage.

Let’s look at an example of how leverage can have a notable impact on scalping returns:

• Let’s say that you are looking to scalp Disney stock in the minutes after the firm begins its quarterly earnings call.
• You decide to go long on Disney stock at a stake of $500 after the CEO announces that the firm beat revenue forecasts by 24%
• Over the course of the next five minutes, Disney stock increases by 0.7%
• You close the position – so your $500 stake at gains of 0.7% amounts to a profit of just under $3.50.

Now let’s consider the result of this stock scalping position if you were to utilize leverage of 1:4, which is permissible in the US as long as the trade is closed on a same-day basis.

In this example, your $3.50 profit is amplified to $14. Similarly, if your scalping position resulted in a loss of $3.50, this would also be amplified to $14 – but in the red.

The key takeaway here is that although scalping requires a large capital balance, leverage can make the process more viable.

However, leverage can also result in much greater losses. As such, unless you are consistently entering and exiting winning trades, scalping with leverage can be ultra-risky.

How much money do you need to be a swing trader?

One of the key advantages of swing trading over scalping is that you can get started with a much lower amount of capital.

The reason for this is that you will be keeping trades open for several days or weeks at a time. And in turn, this enables the respective position sufficient time to rise or fall, depending on your trading style and whether you are long or short on the trade.

• For example, even forex pairs that are considered stable can move considerably over the course of a few weeks.
• This is especially the case if a so-called ‘black swan event’ occurs, such as a central bank deciding to de-peg its currency from the US dollar.

Nonetheless, the key point here is that swing traders will target much larger profit margins than scalpers. And therefore, there is no requirement to risk large sums of capital to make swing trading financially viable.

Let’s look at a quick example to illustrate this point:

• Let’s say that you are looking to swing trade GBP/USD
• You have identified that a key support line could be broken in the coming hours, so you enter a limit sell order at 1.2209
• Your hypothesis is correct, your limit order is triggered – meaning the short-selling position on GBP/USD is now active
• Over the course of the next few weeks, GBP/USD continues its momentum to the downside and is now trading at 1.1701
• You believe the trend could be about to reverse, so you close the swing trading position

In the above example, you entered a short selling position at 1.2209 and closed the trade at 1.1701. This means that over the space of several weeks, you made gains of 4.1%.

With or without leverage, this represents a very healthy profit margin. As such, swing trading is a lot more suitable for modest investment sums.

How Is swing trading better than scalp trading?

I also explained that swing trading enables you to take your time when it comes to researching potential trades and entering/exiting positions.

You will, however, need to have a firm grasp of relevant fees when comparing scalping vs swing trading – as this can and will have a direct impact on potential returns.

Fees to consider when comparing scalping vs swing trading

First and foremost, regardless of the asset class, market, or chosen brokerage – you will always need to pay a fee of some sort to trade online.

With that said, depending on whether you opt for a scalping or swing trading strategy, certain fees are more important than others.

For example:

Spreads and commissions

Having access to competitive spreads and commissions is of the utmost importance when adopting a scalping strategy.

This is because as a scalper, you will be targeting very small margins. For instance, in the example I gave earlier, I noted that a scalper made a 9-pip profit over the course of a few minutes.

However, this did not include any trading fees. Depending on your chosen broker, you might be required to pay a spread, commission, or a combination of the two.

• Standard brokerage accounts, for example, generally offer commission-free trading alongside a spread.
• Let’s say that on this 9-pip position, your broker charged a spread of 1 pip to enter the trade.
• This means that in effect, your 9-pip profit is already reduced to 8 pips.
• You again paid a spread of 1 pip to exit the trade, so your profit is reduced to 7 pips.
• From a percentage perspective, this means that your scalping gains have already declined by just over 22%.

As the above example illustrates, scalping is only feasible if you have access to super-competitive spreads and/or commissions.

In the case of swing trading, however, you will be targeting much higher profit margins. This means that you won’t need to be so fixated on minute changes in the spread like scalpers are.

While low fees are still important, a slight variation in trading costs ultimately won’t have much of an impact when swing trading.

Overnight margin fees

When trading on margin, fees will be charged if the position is kept open overnight and/or across the weekend.

Scalpers do not need to factor this cost into their profit and loss margins, as positions are only active for a few minutes.

Swing traders, on the other hand, might decide to keep a position open for several weeks. If the position is leveraged, this can result in trading costs adding up very quickly.

This is especially the case if high levels of leverage are being used.

• For example, just remember that currency pairs are traded in lots of 100,000 units.
• This means that unless you have $100,000 at your disposal to trade an entire lot, your position will be leveraged.

Therefore, this is a consideration that you will need to make if you elect to deploy a swing trading strategy.

Conclusion

In most cases, unless you are an experienced trader with access to vast sums of capital, you will likely be a lot more suitable for swing trading.

With that said, you might consider giving both strategies a test drive via a risk-free demo account, to determine which option is best for your trading goals.