Why Are Scalping and Day Trading Considered A Bad Way To Trade In Forex?

They say there is more than one way of skinning a cat. If you’re an experienced trader, it can be tricky to teach a newbie how to trade since there are so many methods.

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, they seem to be painted with the same negative brush. For years, the trading community has been divided over the two, with many considering them ‘a sucker’s game.’

So, let’s look at the crucial factors over why countless experts see scalping and day trading as unsustainable (how traders could have a better chance of succeeding).

The industry perception

The currencies market is not regulated everywhere, and it’s become less professional over the years. While this has given access to virtually everyone, not just the ‘big boys,’ it has brought on many problems. Now the industry image of forex is that of an easy, get-rich-quick scheme.

Much of the marketing we see online, ranging from brokers, and influencers to marketers, and so-called gurus, paints pictures of instant gratification and a materialistic lifestyle.

Unfortunately, scalping and day trading fit this mould 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 ‘hard work.’

Thus, industry perception is one of the fundamental reasons some traders strongly argue against scalping and day trading.

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. 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 tight. So, the likelihood of being kicked out of trades often is high.

Alternatively, it wouldn’t be unusual for short-term traders not to use stops at all or widen them. With this practice, your chances of losing a large portion of your account are increased.

So, while short-term opportunities are plentiful, you need to understand the inherent difficulties of the risk to reward.

The time-frame reference

The other drawback of scalping and day trading refers to the chart reference. Here, traders observe lower time-frames, starting from the 30-minute chart to the 1-minute chart.

Although there is always action on these time-frames, it’s ‘noise.’ This term refers to the erratic and random price action we see on such charts that make it difficult to trade. Yet, as you go higher, fluctuations appear smoother and less challenging to trade. While traders view the same price action on smaller time-frames, it's much more pronounced and erratic.

Success in scalping and day trading requires a lot of concentration and emotional discipline to handle these charts consistently. Furthermore, short-term traders often spend hours in front of their computers, which may not necessarily be productive or translate to bigger profits.

The trading costs

Trading costs are another disadvantage of short-term strategies. Although 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 of reward of scalping and day trading. If you do, let’s say, more than 50 positions in a month, spreads or commissions can form a sizeable portion of the profits.

Luckily, several brokers are offering fixed, or zero spreads as a solution.

How can scalping and day trading work in forex?

Fortunately, there is light at the end of the tunnel. Although the points in the previous sections discredit scalping and day trading, it’s possible to still be successful.

The advantages of scalping and day trading are that you can:

• Trade only a handful of pairs
• Use one or two time-frames for analysis and execution
• Only trade during certain periods
• There are numerically more opportunities

Still, the 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 lower time-frames, know how much time to spend, and not have unrealistic expectations in performance, the possibilities for success are higher.

Final word

This article's main point is to highlight some drawbacks of scalping and day trading. It’s crucial to understand why there is somewhat of a backlash against these trading styles. Like most things, there is no perfect 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.