Scalping, Swing Trading, and Price Action: The Most Famous Trading Strategies

Before you invest

You should know that no trading strategy is 100% infallible. A strategy with a 70% success rate is considered highly efficient. This is important to grasp before you deposit any money with a broker. Here’s a takeaway of what you might encounter:

  • Before testing with real money, test your strategy on a demo account. Most forex brokers allow you to open their accounts for free with a demo account if you want to try your luck first. You should perform complete backtesting (applying your model to earlier markets and see how it correlates) as well.
  • Don’t rely on someone else’s strategy. What works for them might not work for you. It all depends on your personality, so you’ll have to use the trading strategy that best suits you. Some high-risk traders have a hot temperament without much patience, so it’s highly unlikely they will use strategies that require hours or even days to profit.
  • Test several strategies and see what works for you. If one system doesn’t produce the expected results over time, you might want to switch to another one that best fits the current market. Remember, the market moves in cycles, so not all strategies can be applied for the same period.

With this in mind, let’s see what three of the most popular trading strategies out there are.

Choosing a Trading Strategy

There are many trading strategies —some of them quite simple to understand and apply. If you are disciplined and have good risk management, your opportunities to earn money in the market increase. These systems are based on technical analysis tools, so we need basic knowledge before we apply them. However, most successful traders use very simple techniques that allow quick market interpretation and generate easy-to-follow trading signals.

Scalping

Also called intraday trading, scalping involves executing short-duration operations, which can range from a few seconds to some minutes. Scalpers aim to take advantage of market micro-movements. They generally use technical indicators, but some rely on price action, which centers around speed and volume.

Scalping

Volatility is a must when it comes to scalping —this is why traders love cryptocurrencies. But if you’re going for the equity market, make sure you choose a market with high liquidity. Scalping is all about opening a position and maintaining it for short periods —but they are risky.

To be a successful scalper, you need to be a methodical trader and adjust a good stop-loss in each operation. As outlined above, it is a high-risk technique, requiring extensive market knowledge and high-level technological support.

The best time to scalp is market opening, mid-day, and closing. Look for assets with high liquidity, including stocks, currencies, indices whose business volume is high, and cryptocurrencies. Choose a broker with low spreads (spreads between the purchase price and the sale price) and with fast buy/sell executions.

To sum up:

  • Choose your assets carefully. Make sure they have high liquidity.
  • Choose a suitable broker for this trading technique (some brokers prohibit scalping).
  • Choose the best time to trade (opening, mid-day, and closing).
  • Employ leverage and proper risk management.
  • Define a strategy to open and close positions automatically.

Scalping involves a short-time position in the market. It requires excellent analysis speed, decision-making, and using your tools as fast as possible. Not surprisingly, conservative traders will avoid these strategies.

Swing Trading

Swing Trading involves a more significant period, usually projected beyond a period of weeks. Its main objective is to take advantage of momentum in the market, either bullish or bearish.

Swing trading is a short-term strategy for traders that use a set of technical indicators that suggest an imminent price movement that could last days or weeks. Swing traders emphasize technical analysis more than fundamentals. They keep constant track of an asset and determine when a “swing” could occur.

Swing traders are not concerned with the long-term value of a currency. Instead, they look to profit from spikes and dips depending on market momentum. Swing trading is not so different from scalping —the only difference is the timeframe.

Swing Trading
Source: Prime XBT

Here’s an example of Swing Trading. The price surge of BTC/USD from its low on December 16, 2020, to January 8, 2021. The three-week rally for BTC is precisely the kind of move swing traders are looking for.

example of Swing Trading

Swing trading is just as risky as any other strategy. If carried out correctly, it can be one of the most solid trading strategies for you.

Price Action

Price Action is a trading technique based only on analyzing the price of an asset without using indicators, as they are considered laggy and unnecessary. What you should be focusing here is on price behavior at critical levels —resistance and support levels.

Resistance and support levels are the visual accumulation of buy and sell orders —which are the only thing that really moves the price. There are four key moments of price action:

  1. When the price fails to surge under relevant resistance, it is a selling opportunity.
  2. When the price fails to fall above relevant support, it is a buying opportunity.
  3. When the price makes a failed test under relevant resistance, it is a selling opportunity.
  4. When the price fails a test on relevant support, it is a buying opportunity.

Analyzing a chart usually involves countless indicators, like oscillators and averages. But the price action trader doesn’t bother to use them at all. He only cares about what the candles are doing in real-time. Decisions are made based on price movements.

price fails a test

The entry opportunities in which the price cannot advance are confirmed when we see two attempts at the relevant level. It is not that the relevant level is not able to reverse the price trend, many times it is, but it is not worth risking our capital by betting on a sudden trend reversal. It just doesn’t give us enough statistical advantage.

We have more elements to increase our operation’s success rate in this type of situation, but explaining them is far beyond the scope of this article.

As an exit signal, an unsuccessful attempt to advance against the appropriate level is usually enough to undo the position.

On the other hand, opportunities in which we bet on a movement after a failed test (which is around 3 to 4 candles) allows us to see a bigger picture if we rely on volume or an indicator such as force index, which includes the volume implicitly.

Final Thoughts

These are three of the most popular strategies out there, but they are not all, of course. You just need to find the one that suits you best.

Keep in mind it is important to have proper risk management for your trading account. Never risk money you can’t afford to lose if the trade does not go as expected. This is especially important if you are trading with leverage —which allows you to increase your earnings as if you were investing more money than you actually have in the account, but it can also, in the same way, multiply the losses.

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