In this overview, we will discuss what is scalping and whether this strategy suits everyone.
Scalping is a popular method of short-term trading in Forex with the use of leverage and low spread.
What is scalping?
The definition of "Scalping" means a short-term intraday trading strategy with a short period of time. Scalping make a lot of intraday trades – short and with modest goals. The
technique consists of quickly “cutting” small profits off the price
movement of certain instruments.
The option of availability of Leverage has made scalping quite a popular
strategy. A small fluctuation by a couple of points can bring the trader
a serious profit thanks to large leverage. Scalping is perfect for
traders with a small deposit that does not allow for long-term positional trading. For scalping, we use small timeframes: M1, M5, M15.
Unlike
many other strategies, scalping requires much time and effort. You have
to keep a close eye on the market the whole day, find entry points, and
make trades. Potentially, scalping can bring large profits, but in
practice, it requires a well-tried trading strategy and psychic and emotion stability.
Who is scalping suitable for?
Scalping
does not suit everyone. The profitability of each trade is usually low,
and a significant profit is reached by aggregating the small profits
from multiple trades. A scalper must be patient to wait for their effort
to bring fruit. To become a successful forex scalper, one needs self-control, attention, and discipline.
Scalping requires much more time and accuracy than any other strategy, such as swinging or trading the trend.
A typical scalper opens and closes dozens of positions during a typical
trading day. For some people, such a task might turn out overwhelming.
Advantages and drawbacks of scalping
Let us have a look at the positive and negative sides of scalping in Forex.
The advantages of scalping
- The strategy is potentially profitable both in the short and long run;
- You do not need to wait for a trend to form in the market. You can scalp any time: by trading the trend or trading counter trend, or in a flat market condition;
- Market analysis becomes simpler. You use technical analysis and indicators to estimate short-term trends; fundamental factors are accounted for selectively;
- It
is suitable for trading on small deposits. Thanks to leverage, you can
open significant positions and make profits even on a moderate deposit.
The main disadvantages of scalping
- Choosing a decent broker
is difficult. You need advantageous trading conditions for scalping:
minimal spreads and commission fees, no critical slippages. Not every
broker can provide all this;
- An increased risk connected to large leverage: even a small market move against the trader can result in serious losses, this is why you need to use the rules of risk management;
- You
spend a lot of time and involve deeply in your trading. You have to
keep an eye on the market constantly because you open dozens of
positions. Scalping take up much of your energy and might end in a
professional burn up.
- A limited number of available trading
instruments. Not any instrument suits scalping. To decrease expenses
from a large number of trades, choose assets with minimal spreads.
How to succeed in scalping?
To increase your chances for success, you will need the following.
1. A tried and reliable trading strategy
It
is the main instrument of a scalper that helps to make a stable profit.
You can make a random profit several times, but without a proven
strategy, a trader is destined for misfortune in the long run. Hence,
start with testing your strategy on a small deposit demo account.
2. A trustworthy broker with suitable trading conditions.
The
trading conditions provided by the broker influence the results of
scalping tangibly. Apart from being reliable and having a license, your
broker should be loyal to scalpers and provide high-quality services. A
high speed of order execution, low spreads and commission fees,
acceptable slippages are the criteria that a scalper should check.
3. Suitable instruments
Not
all instruments suit scalpers. The most popular ones in Forex and
majors, because they boast minimal spreads and commission fees. You can
also use certain cross-rates, as for exotic currency pairs, their spreads are too large.
4. Right time for trading
The
timing to trade a trade is also important. Analyze your strategy and decide
at what time of the day it works the best. Or, it may yield the best
results during a certain session: Asian, Pacific, European, or American.
If so, try to trade at this time.
5. Analyze your trading statistics
Investors
say that you previous success does not guarantee success in the future.
Hence, you need to analyze your trading regularly, shooting troubles. A
useful instrument is a trader's diary. It can increase your discipline, find mistakes, and master your trading style.
Trading strategies for scalping
Nowadays,
you can find plenty of scalping strategies on the net. Still, approach
every strategy individually: one trader prefers an empty price chart,
another one enjoys indicators, the third one sticks to automatic
trading.
Choose your strategy based on your preferences and test
it well on a demo account before trading for real. Now let us discuss
three strategies meant for scalping.
2 Moving Averages Scalping Strategy
This is a scalping strategy using 2 simple moving averages of 20 period and 50 period, a signal bar indicator (to observe trend strength) and in subwindow StepAbsoluteQQE indicator for filter entry and exit signal. It can use on 1m and 5m chart.
Example of the strategy setup :
Bottom line
Scalping
is a popular way of trading in Forex. It helps to make a good profit
even on small deposits but requires much effort and durability from the
trader. You need all the conditions to be met (the strategy, broker,
etc.) and to control risks to succeed.
