Trading 101: Scalp vs. Day Trading vs. Swing vs. HODL
Take a seat, kick back and grab a coffee for this one, especially if you are new to crypto trading. Although the title might ambiguously suggest that you are on the verge of filling out a Buzzfeed-like questionnaire about which zodiac sign is most romantically compatible with yours, this article is actually far from that and could contain some bits of information that can help novice traders explore the relatively new and daunting realm of crypto-trading.
In the previous article, I introduced the idea that there may be multiple approaches to trading. We dove into three commonly known market trends (trending, ranging, and choppy markets) out of which we concluded that the saying “the trend is your friend until the end” truly applies when attempting to spot the general direction of the market. Although we implicitly discussed the influence of time on trading in our previous articles, this variable’s ability to impact traders of any kind (novice or experienced) means it should be addressed in more detail.
What Type of Crypto Trader Are You?
If you have ever looked at charts yourself, you probably might have stumbled upon something called timeframes. The question that may have arisen from this discovery could then have been “what timeframe works best for me as a trader”? Is it the 1 minute or the 1 hour timeframe? Or is it 1 day or even monthly? To understand what strategies best suit you as a trader, determining the time horizon you trade in is crucial. But what does ‘’timeframe’’ truly mean?
Although explicitly, timeframes indicate price movement over a selected time interval (e.g. 1 hour = movement of price during that hour), the concept of timeframes extends beyond this notion. In fact, understanding how long one needs to keep the trade open, or in other words how long you need to hold a position, can also be considered a timeframe. Albeit more subjective.
Today we will be discussing the four main categories of traders known as Scalpers, Day Traders, Swing Traders, and HODLers (or long-term investing). Each trades with their respective strategies, using their respective timeframes. The easiest way to determine how long you should hold a trade is to choose which one of these suits your trading strategy the best.
So, what is your trader spirit animal?
What Are The 4 Trading Styles & How Are They Applied?
Scalping is a way of investing in which active traders try to make profits near-instantaneously and in quick succession by jumping in and out of trades at a moment’s notice. These types of traders often take positions for a few minutes or even a few seconds per day to maximize their gains and, in case the trade goes sideways, minimize their risk exposure. The goal of this strategy is to trade frequently during the day, subsequently allowing profits to build up considerably over the course of a few trades. Using leverage, scalpers often capitalize on large deposited amounts to be able to make even larger profits.
Scalping often occurs during moments of high volatility. As such, it is a very risky trading technique for the inexperienced. The price volatility of the cryptocurrency market is optimal for this type of risky trading. During times of high volatility, the scalper makes use of fast price bounces using a technique known as mean reversion. This is a market maker strategy that will be discussed at a later stage of this Trading 101 series as it involves EMAs and the movement of price, usually after rapid capitulation. In short, it revolves around the notion that the price often reverts back to EMAs after a moment of high upward or downward volatility.
Although scalping can offer large rewards when applied correctly, it can also be very complex and potentially be too risky for novice investors. This is mostly due to its dependence on high volatility and the necessary degree of attention expected to time such trades. Overall, this technique requires expertise to make rapid decisions which is not suitable for everyone.
Daytraders are active in the market almost every day. Similar to scalpers, they open and close at least one or more positions per day in an attempt to seize trading opportunities. Their goal is to close every security, or in the case of crypto, cryptocurrency positions at the end of each trading day. Since the timeframe is less than a day, this type of trader tends to lean more toward the smaller timeframes (usually between 5min and 1H).
Much like scalping, day trading is mostly frequented by highly experienced traders, and, therefore, not recommended for beginners. The daytraders are, as the name would suggest, glued to their screens all day, looking for the next best trade available. It can be seen as a full-time job.
Swing trading is a way of trading where the investor tries to make money by trading in short to medium-term intervals. This usually consists of a few days or at most a few weeks and is considered by many to be less risky than the aforementioned two types of trading.
Swing traders mainly use technical analysis to seize opportunities and minimize risks. As a result, they frequent the 4H and daily charts, since this caters to their strategy the most. Compared to scalping and day trading, this style of trading is more geared toward novices and beginners as it is less time-consuming and less intensive. This does not mean you should blindly invest and hope for the best. Rather, you should do ample research before employing this technique. In addition, it should preferably be conducted at lower leverages in order to lower risk exposure over longer periods of time.
“Time in the market beats timing the market when you are not as experienced at reading the market”.
HODL (long term investing)
Long-term investing is the simplest form of ‘trading’. In fact, some do not even consider it trading due to the low risk associated with this strategy. So much so in fact, that the term hold has been renamed to “hodl’ after meme-culture took over the crypto industry. This strategy simply consists of holding the asset or cryptocurrency for more than half a year (or even longer seeing as there is no predicated time horizon which makes this investment strategy more or less efficient).
Most investments done on this principle are guided by fundamental analysis. Personally, in order to determine if an asset is worthy of investment, I tend to research the project for a few days (maybe even weeks) before jumping in. My main thought in this instance is “Will the project likely survive and grow during the upcoming 3+ years”? If the answer is yes, I basically grab a bag of the asset or cryptocurrency in question, and get on my way.
So… What Is Your Trader Spirit Animal?
All jokes aside, although the main difference between the aforementioned trading styles can be summarized as the frequency of opening and closing one’s positions during the respective strategy’s timeframe, they all require a different level of expertise and therefore various amounts of trade time dedication. While the fast rewarding effects of shorter more volatile trades may seem enticing, they can also carry a heavy burden when risk management is not applied correctly. As such, hedging various trades against investments/holdings (as was touched upon in my Trading 101: Long vs. Short article) could be an interesting approach, especially considering this could be done using the discussed trading styles.
If you are able to sit behind a screen for multiple hours a day, multiple days a week, then, you may quickly begin to understand market movements & patterns. This could subsequently allow you to become proficient with the more aggressive trading tactics and therefore better able to pick and choose the strategy of your choice. Once trading becomes near second nature, and proper risk management techniques have been considered, the strategies could also be used intertwiningly (at one’s own discretion of course). As you can imagine, experience plays a key role when it comes to managing multiple trading strategies at once. Whether you are new, intermediate, or experienced in trading, it will always be a challenge to read the market perfectly. As such, always stick to your strategy and remember to set stop losses in order to minimize any potential losses. Stay smart, stay safe.