Scalping, Day trading, Swing Trading, Investing….

Written by admin

July 26, 2022

Which approach should I take?

Having spoken with a number of individuals keen to become involved in trading the markets, a common theme we have found is that new entrants / novice traders have not conceived / developed a mindset of how they plan to trade.

There is not a singular approach to be successful in the market and ultimately your approach should be tailored against a backdrop of how much time you plan to or would like to spend in the market, your personality and how you respond to the stress of the markets.

The impact of your persona on trading styles / outcomes, will only become obvious to novice traders over time, when they have identified how they respond to profit / loss swings.

In a nutshell, our observations of various approaches to trading are summed up below.

Scalping: Very short term trading mindset (primarily trading 5-15 minute channels), high frequency trading, small margin of error requiring traders to be very switched on and suits individuals that are keen to profit take. High stress level and requires an individual to be monitoring minute-by-minute candles to identify opportunities. This approach likely to constrain how many equities a trader can track simultaneously.

Day Trading: May stay in trades for hours or an entire day, trading 15 min – 1 hour channel breakouts, running few trades per day, increased margin of error is possible to still be successful, suits individuals that do more rigorous analysis and are ok to see position P&L swing a little before their trade matures over a day to reach the target level.

Swing Trading: Usually in a trade for several days / 1 week showing patience to allow a trend to emerge over a greater time period, usually keen on utilising 4 hr / 1 day channel moves to achieve success, shows greater degree of patience and is certainly ok to see position profit swing before their targeted trend builds real momentum. Trader should be able to monitor and trade diverse portfolio of equities as time is on their side to pick / choose good entry points for selected trades.

Investing: Not overly fussed about ST channels and keen on seeing a trade play out over 3 months, 6 months or even years before checking out. Usually focused on trading company stocks and potentially indexes too. We often find inexperienced traders take this approach when they become emotionally attached to selected equities and want to invest in them, rather than employing rigour in assessing where and when to invest.

Which approach is best?

There is no best approach, though novice traders may inevitably be attracted by the ‘trading’ approach and success of the Medallion Fund or top daytraders; being less interested in generating passive income and more focused on dedicating themselves to the markets full time. This comes with risk too, especially if you are not fully prepared and equipped with requisite skill to manage the danger of being in the casino so often…….

A short while back, we ran a series of tests internally to monitor the performance of day trading versus swing trading. The test was run over a 1 month period, running spread bets on leading indices and company stocks (primarily FTSE 100 and Dow Jones companies).

The Day Trades were live trades using real funds and required regular scrutiny, on average 5-6 hours of trading time per day.

The Swing Trading approach was executed on demo trades, with limits preset for trades to close automatically (the 1 unsuccessful trade was closed manually after missing the limit for close by a fraction of a %) – these swing trades required up front 4-5 hours of scrutiny (equity screening, model evaluation and trade entry / exit determination) and were then left for the next 4 weeks to close.

Test Results

Trade Approach No. of Trades Average trade length Win rate Net Profit / Total Margin (annualised %)
Day Trading 326 1.18 days 89% 218%
Swing trading 29 7.03 days 96.6% 147%

 

Closing thoughts

These results are just a representation of our direct experience in the market and should not necessarily underpin your own approach.

Based on effort versus outcome, Swing Trading presents a much less intense and yet profitable approach for us, whereby our upfront validation for half a day prior to the start of the 1 month test period generated a phenomenal set of results. We left human emotion out of these trades and they hit their target levels, closing in profit, during the test period.

In the words of one successful trader we spoke with a little while back, he stated he had full confidence in his positions reaching their target close levels and he was prepared to therefore let trades play out until they closed in profit automatically or reached a point that he was satisfied to close them manually….For example, if a skilled trader enters a short on Nikkei 225 at 28000 to ride it down to 25700, why would they cash out after just 400 points and sacrifice the remaining 1900 point potential.

So is short term profit taking a result of uncertainty of whether you made the right move in the first place??? Something to stew on…..

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