Trading Styles and Time Horizons
This lesson describes the principal trading styles, the holding period and cost profile of each, and the personal constraints that determine which style is appropriate.
Risk note: educational content only. This article is not financial advice, investment advice, or a recommendation to buy or sell any instrument. Trading leveraged products can result in losses greater than expected, and each reader should understand the risks before trading.
Trading styles are conventionally classified by the length of time a position is held, from seconds in the case of scalping to several weeks in the case of swing trading. No style is inherently superior. Each imposes a different demand on the trader's time, a different sensitivity to transaction costs and a different exposure to overnight and weekend risk. A style that conflicts with the trader's schedule, capital or temperament is a frequent and avoidable cause of poor results. This lesson sets out the characteristics of the three main styles and the criteria by which a trader should select one and adhere to it for a sufficient period.
Classification of trading styles by holding period
A trading style is defined principally by the intended holding period of a position. Scalping involves positions held for seconds or minutes, with many trades in a session and small profit targets measured in a few pips. Day trading involves positions opened and closed within a single trading session, so that no exposure is carried overnight. Swing trading involves positions held for several days to several weeks, with the objective of capturing a larger portion of a directional move on a higher timeframe.
The holding period determines most of the other characteristics of a style: the number of decisions required per day, the proportion of each expected gain consumed by the spread, the relevance of overnight financing, and the degree of attention the trader must give to the market while a position is open. These consequences, rather than the apparent excitement of a style, should govern the choice.
Scalping and the sensitivity to transaction costs
Scalping seeks to profit from very small price movements repeated many times. Because the profit target on each trade is small, the spread and any commission represent a large proportion of the expected gain. A target of 5 pips on a pair with a spread of 1.7 pips surrenders approximately one third of the target to the spread on every trade; on a spread of 0.8 pips the proportion falls to roughly one sixth. Scalping is therefore only viable on instruments with tight spreads and on account types designed for low-cost execution, such as the Onys Kapital Pro account with spreads from 0.8 pips.
The style also requires uninterrupted concentration for the duration of a session, rapid order entry and a stable connection, since a delay of a few seconds can eliminate the expected gain. For these reasons scalping is the most demanding style to execute well and is generally unsuitable as a starting point for a new trader.
Day trading and the intraday horizon
Day trading closes all positions before the end of the session. This removes two categories of risk that affect longer holding periods: overnight financing, which is charged on positions held past the daily rollover, and gap risk, which arises when a market reopens at a price materially different from its previous close. Day trading is consequently a comparatively controlled environment in which to develop execution skill.
The principal constraint is availability. Day trading requires the trader to be present during the active hours of the chosen market, typically for a consistent block of several hours each day. Most intraday setups occur during the periods of highest liquidity, and a trader whose available hours coincide with a thin period of the market will find that a tested intraday strategy behaves differently from its test results.
Swing trading and overnight exposure
Swing trading operates on daily and four-hour charts and holds positions for days or weeks. The number of decisions is small, screen time is limited to a periodic review, and transaction costs are a minor proportion of the expected move because targets are measured in tens or hundreds of pips rather than in single figures. For a trader with full-time employment, this is usually the most practical style.
The trade-offs are overnight financing, which accrues on every night a position is held and includes a three-day adjustment once a week to account for the weekend, and gap risk over weekends and scheduled announcements. Swing trading also requires the discipline to leave a position undisturbed through intraday fluctuations that are irrelevant to the higher-timeframe thesis.
- Scalping: seconds to minutes; very high attention; spread is a large proportion of each target; tight spreads essential.
- Day trading: intraday; moderate attention during fixed hours; no overnight financing and no gap risk.
- Swing trading: days to weeks; low attention; overnight financing and weekend gap risk; patience essential.
Criteria for selecting and committing to a style
Three questions determine the appropriate style. The first is when the trader can observe the market without interruption, since available screen time is a fixed constraint rather than a preference. The second is how the trader responds to holding an open position through a weekend, which indicates tolerance for overnight exposure. The third is the amount of capital available, which affects the viability of short-term styles once costs are taken into account.
Once a style has been selected it should be applied consistently for a sample of at least one hundred trades before it is evaluated. Changing style after each unprofitable week prevents the accumulation of a meaningful record in any of them, and a trader who has not accumulated such a record has no evidence on which to base an assessment.