Scalping is a kind of trading where many deals are opened with the goal of making a modest profit from each. Simplistically put, scalpers are traders who focus on making money off of very minor price fluctuations.
If an exit strategy is strictly adhered to, a substantial accumulation of tiny profits can be realized. Contrast this method with fundamentals-based long-term trading.
How Scalping Trading works?
Trading terminal vigilance is essential for successful scalping. This is due to the fact that a trader must essentially open and terminate a huge number of positions in order for scalping to be lucrative.
Timing your trade entry and exit with the help of charting time frames is also crucial. Scalpers in the forex market typically study price action on 1-minute or 5-minute time frames. Scalpers almost never keep an eye on charting time frames longer than 15 minutes.
The primary goal of most scalping strategies is to anticipate large price swings. Once a target is singled out, scalpers will either move in the same or opposite way.
Scalpers need to open at least five transactions every day to make the strategy work. Scalpers’ best bet for making a profit is to open a large number of small positions often during the day. This is because market participants can only react to very slight shifts.
Scalping vs Day trading
Scalping is commonly practiced in the context of day trading. However, these two approaches to trading are distinct from one another, particularly in terms of time frames and position sizes.
For day traders, the ideal time window for closing a trade is the same day, but for scalpers, this is too long. Numerous roles are sometimes made available within a half-hour to an hour. As was previously said, scalpers choose charts that update every minute or every fifteen minutes.
Day traders, on the other hand, typically deal in time frames of 30 minutes or an hour. All positions are opened and closed on the same day, typically within the span of a few hours.
Since scalpers aim for relatively little gains, they have no choice but to use large position sizes. This goes against the grain of day trading and swing trading, both of which typically employ standard account and position sizes.
Advantages of Scalping
Scalping in trading has many benefits. For starters, traders are protected from sudden trend shifts. There are financial assets that follow one trend for a while and then switch to another.
Second, the proportion of successful transactions (the “win rate”) is expected to increase. Successful scalping, according to more seasoned traders, requires a success rate of at least 80%.
Scalping allows a trader to make quick profits without having to learn a great deal about the item being traded. Scalpers, in contrast to long-term traders who rely on fundamental data, place greater emphasis on technical analysis.
Disadvantages of Scalping
The lack of proper risk management is the major drawback of scalping. Keeping a sizable position open is also risky. As a result, stop losses are crucial to any scalping method, but especially so for Forex.
Scalpers risk incurring massive losses if they don’t protect their trades with strong stops. This is especially true when currency pairs have brief reversals in their trend.
Managing risk in Scalping
For scalpers, it is crucial to use stop-loss orders. This is because of the increased dangers typically associated with scalping techniques. Therefore, it is imperative that traders consistently use stop losses to safeguard their investments.
If you don’t use firm stops on your positions, you could lose a lot of money. Scalpers, because of their huge position sizes, typically set their stop losses 5 pips below their market entry.
Leverage is directly proportional to the size of the resulting position. As a result, reducing leverage is recommended. By doing so, they lower the amount of uncertainty surrounding a trade.
Reducing market exposure is another important risk management strategy that complements stop-loss orders. A trader can lessen the likelihood of encountering disruptive events by spending only a brief amount of time in the market.
Which time frame best for Scalping?
Scalping methods are typically developed on a 1-minute chart, with some traders going up to 15-minute time frames. The most popular time frames used by scalpers are 1 and 5 minutes.
The former is better for traders who want to spend as little time as possible monitoring the market. These traders “scalp” the market for gains of no more than 5 pips at a time. The latter is designed for traders who want to make 5-10 pips every deal.
After some practice, you should be able to zero in on the timeline that works best with your abilities.
Best Scalp trading strategies
Now that we have defined scalping, we can move on to discussing specific methods that can be used on a regular basis. Technical analysis techniques are commonly used by scalpers to spot promising trading opportunities.
Professional scalpers frequently employ the following technical indicators:
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Parabolic Sar Indicator
Parabolic Stop and Reverse (SAR) is one of the best technical indicators for usage in scalping these kinds of market conditions. As a result, scalpers might use it to find several daily contrarian trade chances.
When the Parabolic SAR is located below current Forex market values, a “buy” signal is generated. Conversely, “sell” signs are present when the indicator rises above current market values.
The unique feature of the Parabolic SAR is the signals it provides for closing each position. It’s safe to hold long positions until the indicator “stops” and “reverses.” This is a fresh indication from the indicator, and it calls for a change in trading strategy.
2. Stochastic Indicator
The stochastic oscillator is a momentum indicator that can be used to spot whether the market is overbought or oversold. Starting with a downward price move, an oversold condition is established in the 5-minute chart’s historical stochastic readings.
This temporary shift in price may have presented a fresh opportunity for scalpers to open long positions. In order to protect capital, a stop loss order would be set below the price low that caused the Stochastics indicator to signal an oversold condition for this scalp trade.
Once a deal is open, it should be closed for a profit as soon as possible. This, of course, implies realizing trading gains in excess of the fees charged by a broker.
The first technical indication that the trade should be closed comes when stochastic indicators enter overbought levels. The original justification for the trade has been removed, and the market may be preparing for a downward turn as a result of this development.
At this point, skilled scalpers would exit the long trade for a modest profit.
3. Moving Average
One of the most used types of technical indicators is a moving average. Scalpers employ Exponential Moving Averages (EMAs), as shown in the following chart, to enter and exit trades quickly. Compared to other types of moving averages, EMA gives more weight to the most recent data available.
As soon as prices drop below the 50-period EMA, traders have a clear indication to start shorting the market. When market prices rise over the EMA separation line, however, buyers are given a signal to enter the market.
By adjusting various trading parameters, EMAs can be an excellent tool for gauging the likely direction of a trend. When the EMA period is less than 50 prices, more buy/sell signals will be generated throughout each trading session.
However, when using an EMA with a period greater than 50, a smoother moving average line is generated, leading to fewer trade indications. Scalpers can customize their settings to their preferred frequency of trade alerts.
4. Relative Strength Index (RSI)
The Relative Strength Index (RSI) is an indicator that, like the Stochastic, seeks out extremes in the market. Using the RSI for scalping is particularly effective at times of increased market volatility, such as after major news releases. An experienced scalper looking at the gold chart at the bid price of $1,510 would have recognized the negative momentum and entered a short position.
In order to make a profit, scalpers close their positions as soon as the Relative Strength Index (RSI) indicator enters the oversold zone. When prices break down below the trendline support for a second time, it’s clear that there’s another opportunity for a short trade. This would make the short-term trading price of $1,509.80 accessible to scalpers.
Gold prices on the 5-minute charts have broken above the downward trendline, indicating that the second short trade can be closed. Because of this, the trading bias has shifted to be bullish (positive), which has stimulated fresh buying of long positions.
Final Thought
The goal of a scalper is to make a profit from very modest price changes. The theory behind scalping is that it is simpler to capitalize on short-term price fluctuations than on longer-term trends. This strategy entails initiating numerous trades with the aim of netting marginal gains.
This is why tactics based on “scalping” are particularly effective in highly volatile markets like Forex. Scalpers can profit from market news events by quickly jumping on and off the market.
Scalpers can either follow the trend (a trend-following strategy) or trade against it (a contrarian strategy). Traders employing a scalping strategy must constantly check their terminals and open and close numerous trades.
Scalping methods are typically developed on a 1-minute chart, with some traders going up to 15-minute time frames. Traders must always use protective stop losses in their positions, since the dangers connected with scalping tactics tend to be higher.
