They say there is more than one way of skinning a cat, a philosophy very much describing the art of trading currencies. If you’re an experienced trader, it can be tricky to teach a newbie how to trade since there are so many methods of achieving this.
More often than not, most traders undertake a highly iterative process switching between a plethora of strategies before finding what they believe is the right one. As you may know, we categorize most traders as either scalpers, day traders, swing traders, or position traders.
When we move down the scale, the time horizon decreases gradually. Although scalping and day trading are similar yet quite distinct, they seem to be painted with the same negative brush.
For years, the trading community has been divided over whether scalping and day trading, with many considering both ‘a sucker’s game.’ Of course, plenty of people can argue this sentiment with meritable points.
So, let’s look at some of the crucial factors over why countless experts see scalping and day trading as unsustainable and methods of how traders could have a better chance of succeeding.
Firstly, the industry perception
Something bearing mention about this question is the general industry perception of forex for most new traders, which currently still exists. Unfortunately, the currency market is not thoroughly regulated everywhere, and it’s become less professional over the years.
While decentralization and the lack of professionalization have provided access to virtually everyone, not just the ‘big boys,’ it has brought on many problems. So, the industry image, especially for newbies, of forex is an easy, get-rich-quick scheme.
Much of the online marketing we see online, ranging from brokers, influencers to marketers, and so-called gurus, paints pictures of instant gratification and a materialistic lifestyle.
Unfortunately, scalping and day trading intrinsically fit this mold because the ultimate goal is to realize profits in the shortest time possible. It seems far easier to scalp and day trade since the human mind is designed to look for shortcuts, seek pleasure, and avoid pain or ‘hard work’ where possible.
Thus, industry perception is one of the fundamental reasons some traders strongly argue against scalping and day trading.
Secondly, the risk to reward parameters
The second reason for the negative reception stems from the risk to reward parameters. Short-term traders often have small profit targets since their holding time is usually for some minutes or hours. Hence, this group doesn’t aim to capture a bigger move for a day or longer.
Having small targets presents two problems; either tightening the stop or widening it, which can both produce negative expectancy in the long run. Let’s make an example of a scalper who aims to pocket an average of 20 pips on each trade.
With such a small target, it becomes difficult to set a risk-to-reward above 1:1. However, let’s assume the trader averaged 1:1, meaning their stop loss would typically be 20 pips. On most pairs, such a stop distance would be considered relatively tight. So, the likelihood of being kicked out of trades frequently from the natural price fluctuations is high.
Alternatively, it wouldn’t be unusual for short-term traders not to use stops at all or tremendously widen them. With this practice, your chances of losing a large portion of your account at some point are increased.
So, while short-term opportunities are plentiful, you need to thoroughly understand the inherent difficulties of the risk to reward with such strategies. Day traders face similar challenges. While these aren’t to the extent of scalpers, you generally need to have a higher winning percentage if your profit targets are smaller.
Thirdly, the time-frame reference
The other drawback of scalping and day trading refers to the chart reference. All traders in the realm of trading style will observe lower time-frames, essentially anything starting from the 30-minute chart to the 1-minute chart.
Although there is always action on these time-frames, it’s technically ‘noise.’ This term refers to the erratic and random price action we see on such charts that make it difficult to trade due to the fluctuations. Of course, price is always fluctuating on any chart you view.
Yet, as you go higher, these fluctuations appear smoother and less challenging to trade. While traders view the same price action on smaller time-frames, it is much more pronounced and erratic.
Success in scalping and day trading requires a lot of concentration and the appropriate emotional discipline to handle these short-term charts consistently. Furthermore, short-term traders often need to spend hours in front of their computers, which may not necessarily be productive or translate to bigger profits.
Fourthly, the trading costs
Trading costs are another disadvantage with short-term strategies. Although nearly all brokers nowadays have relatively tight spreads, they can still be an issue, particularly for scalping.
However, it’s still generally an aspect to consider, which goes back to the risk-to-reward of scalping and day trading. If you do, let’s say, more than 50 positions in a month, spreads or commissions can easily form a sizable portion of the profits you would have made.
Luckily, several brokers are offering fixed or zero spreads to mitigate this challenge.
How can scalping and day trading work in forex?
Fortunately, there is light at the end of the tunnel. Although much of the points in the previous sections primarily discredit scalping and day trading, it’s possible to still be successful on the condition of a few things.
The advantages of scalping and day trading are that you can:
- Trade only a handful of pairs, say no more than five or less
- Use one or two time-frames for analysis and execution
- Only trade during certain periods
- There are numerically more opportunities
Once some of these factors have thoroughly been established, the second important thing is understanding the risk to reward parameters. Mastering this element involves:
- Using consistent position sizing
- Knowing your historical win percentage
- Aligning the second point with defined stop loss and profit target distances
Moreover, once a trader can handle the emotional challenges of using lower time-frames, know how much time to spend, and not have unrealistic expectations in performance, the possibilities for success are higher.
The main point of this article is to highlight some of the inherent drawbacks of scalping and day trading. It’s crucial to understand why there is somewhat a backlash against scalping and day trading. Like most things, there is no perfect trading method because each of us is unique.
Hence, if any trader would consider scalping and day trading, they need to appreciate what they’re up against in the markets.