Of the range of strategies to trade currency values in foreign exchange markets, scalping and swing trading are at opposite ends of the timing spectrum. Scalping, or quick trading, appeals to new traders because it looks like an easy way to money and there is little chance of getting scalped yourself. Swing trading, which offers the promise of bigger profits, requires more patience and a higher level of vision concerning what's happening in the market to take advantage.
Small Profits Add Up
The smallest value change in forex trading is a pip -- 1/100th of 1 percent of a currency's value, or $0.0001 in U.S. dollar terms. The scalping strategy attempts to earn a few pips with each trade and scalpers stay with a trade for only a minute or two at most. If you trade the standard $100,000 forex lot -- which will cost you $2,000 using a 50-1 leverage ratio -- each pip is worth $10. If you earn 3 pips per trade on 10 net positive trades, you earned $300 for the day. Trade larger amounts or scalp more trades and your daily earnings can be even higher.
Don't Get Scalped
One hurdle to overcome in forex scalping is the spread brokers use as their profits. Instead of charging a commission, many brokers build in a difference between the buying and selling prices for each currency, called the spread. On popular currency pairs, such as dollar/euro or dollar/yen, spreads are typically 2 pips to 4 pips. As a result, every new trade starts out with a loss equal to the spread and the currency must first move to cover the spread before producing a profit. Scalping requires intense concentration on what is happening with forex prices and you must stay at your computer when trades are open.
'The Trend Is Your Friend'
That widely quoted stock-market saying also applies to forex traders who work longer-term price changes. Swing trading focuses on letting a trade ride a trend and trades may stay open for several days. There are many kinds of cycles in the currency trading markets and swing traders look for price points where a currency has a good probability of reversing direction and starting a trend in the opposite direction. One way to predict reversals and trends involves using technical analysis -- examining past price history to predict the future. Forex charting software includes numerous indicators that take past history to provide signals on a chart. Another strategy for swing trading is to employ fundamental analysis that relies on news events to predict prices.
Falling Off the Swing
While swing traders are shooting for much larger profits per trade, they are also exposed to larger potential losses. The leverage involved with forex trading can cause a loss to mount up rapidly if a trend reverses. With trades open for several days you cannot watch your currencies around the clock, so it is imperative to use stop-loss orders with every trade to limit the downside on any losers. Swing trading does allow you to trade in a limited amount of time, as long as you set your take profit and stop-loss targets whenever you open a new position.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.