What is scalping, and how do day trading and swing trading compare?

What is scalping?

Scalping means making many very short trades, each targeting a move of a few pips or points. A pip is the standard unit of price movement in forex. A scalper might hold a trade for twenty seconds or five minutes, and might place dozens of trades in a session.

A forex scalping strategy usually relies on one-minute or five-minute charts for a major currency pair or a big index, during the busiest hours of the day. Those markets and times offer the narrowest spreads.

Scalping depends on how your orders are filled more than any other style does. A target of five pips leaves little room for slippage, the difference between the price you asked for and the price you got. One pip of slippage on a five-pip target makes up a fifth of the trade (how a trade works). Some providers also restrict scalping in their terms, for instance by setting a minimum holding time. So your account’s terms are the place to check.

How many day traders make money?

The largest study on the subject shows that very few day traders make money year after year. Barber, Lee, Liu and Odean held the complete trading records of the Taiwan Stock Exchange from 1992 to 2006. In an average year, about 450,000 people day traded. Roughly 20 % of them earned a profit after fees in a typical year, but less than 1 % became reliably profitable the next year (Journal of Financial Markets).

Regulators describe day traders in the same terms. According to the U.S. Securities and Exchange Commission, day traders “typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status”. The same body describes day trading as “an extremely stressful and expensive full-time job” (Day Trading: Your Dollars at Risk).

Both sources refer to shares, not CFDs. The regulators’ studies cited here don’t break down CFD performance by holding time, so it isn’t established how scalpers fare compared to swing traders with CFDs. The data takes in the whole group. ESMA reported what national regulators had found: 74 % to 89 % of retail CFD accounts lost money (ESMA press release).

How a style fits with a range trading or breakout strategy

Because a style and a strategy answer different questions, a range trading strategy or a breakout strategy can run at any holding time. A range trading strategy sells near the top of a sideways range and buys near the bottom, and it belongs to the mean reversion family. A scalper can run one on a one-minute chart, and a swing trader on a daily chart. The same goes for a breakout strategy, which trades in the direction of a move out of the range.

One approach is tied to a single style, and that’s the carry trade. Because it earns the interest-rate gap between two currencies night by night, it only makes sense as a position trade (forex trading).

What is hedging in forex?

Hedging in forex means opening a trade that gains when another exposure of yours loses. A business expecting a dollar payment in three months can sell dollars forward today and fix its rate. That’s the original use.

Among retail traders, “hedging forex” usually means something narrower: holding a buy and a sell on the same pair at the same time. Whether your account allows this depends on how the platform counts positions. MetaTrader 5 offers two systems. With a netting account, “you can have only one common position for a symbol at the same time”, so a sell order simply reduces or closes an open buy. On a hedging account, each order opens its own position and a buy and a sell can sit side by side (MetaTrader 5 release notes). Your provider sets which system your account uses.

If the company that opens your account is a forex dealer regulated in the United States and a member of the NFA, the choice is made by rule. Under NFA rules, forex dealers “may not carry offsetting positions in a customer account but must offset them on a first-in, first-out basis” (NFA Compliance Rule 2-43(b)). A sell order at such a company closes your oldest buy.

Why a full hedge only locks in the loss

Worked arithmetic: the numbers follow from the formula given in this section.

A full hedge on the same pair locks in the loss you already have, and the numbers explain why. This example is made up. You buy one standard lot at 1.1001, each pip worth 10. The price falls. The quote is now 1.0950 to sell and 1.0951 to buy. Your long trade is down 51 pips, a loss of 510.

To hedge, you sell one lot at 1.0950. From here the short trade gains every pip the long trade loses, so the total stops moving. But the short trade has its own spread to pay. Closing it means buying at the higher price, one pip away. The locked-in loss is 52 pips, or 520, while closing the long trade outright would have cost 510.

Each night, financing is also due on both sides of the hedged pair. Say the long trade pays 7 and the short trade receives 3, because the provider adds its mark-up to each. The pair costs 4 a night for a position that can’t gain. After ten nights the loss is 560.

If you take the hedge off later, you’re left with a plain one-way trade and the same decision as before. A hedged account can still reach margin close-out, where your provider shuts your trades because the account has run too low. Both trades are marked at worse prices at once when the spread widens (leverage and margin).