Strategies and risk
Day trading and scalping
Day trading and scalping are the two shortest-term styles of speculating. They’re not for the faint of heart so it’s important to understand the risks and rewards of each style, which we’ll cover in this lesson.
What is day trading?
Day trading is an approach to the markets that involves opening and closing positions within a single day. The aim is to profit from smaller price movements, without incurring the costs and risk associated with holding a position open overnight.
While day trading does take up more time than the longer-term styles we’ve already covered, thanks to the improved technology available with trading apps, you don’t have to be glued to your desktop. Most day traders choose to execute, monitor and close their positions from their smartphones or tablets instead.
Price action is considered the best way of determining day trades. That is, the candlesticks that are created throughout the day: the most-watched being the previous day’s high and low. It’s believed these can inform day traders on market sentiment and market turning points – or support and resistance.
With that said, most day traders use indicators to support their decisions. Learn more in our technical analysis course.
Day trading might be the right style for you if you:
- Don’t want to incur overnight charges
- Are focused and dedicated
- Have more time to spend monitoring markets
- Are comfortable using mobile apps to trade
What is scalping?
Scalping is the shortest-term trading style. It’s actually a type of day trading, as positions are never held open overnight. But, in fact, most scalps don’t last more than a few seconds to minutes.
The aim is to place a high volume of trades, earning just a small profit on each.
The theory behind the style is that it reduces risk to keep trades running for as little time as possible. Unlike other styles, scalpers don’t hold trades to see if a loss turns to a profit eventually – they cut and run.
But like day trading, scalpers tend to stick to using price action. They find support and resistance levels and use them to enter and exit trades.
Often, scalping positions aren’t open long enough for technical and fundamental analysis to prove helpful, although scalpers will be watching news and events for short-term changes to take advantage of.
A lot of scalping strategies are automated, using computer programs to avoid emotional trading. This means traders don’t have to watch the markets constantly and can rely on their systems to execute trades quickly and rationally.
Scalping might be right for you if:
- You’re disciplined and stick to your plan
- You have an active approach to trading
- You can remove emotion from your decisions
- You’re confident using an automated trading strategy
Test your knowledge
- A Swing trading
- B Day trading
- C Position trading
- D Scalping
- A Swing trading
- B Position trading
- C Day trading
- D Scalping