What You Should Know About Scalping
The Scalping trading strategy profits from small price changes. The profits on these trades are taken quickly once the trade becomes profitable. All trading forms require a trader to exercise discipline. Since the number of trades is substantial, the gains from each small trade are small. The scalper needs to adhere to a strict trading system and avoid huge losses that can destroy the other successful trades.
Scalpers take numerous small profits and take advantage of any small gain when it appears. Scalping relies on the concept of lowering exposure risk as the real-time in the market per trade is negligible. This lessens the risk of an event causing a significant move. Small moves are easier to acquire and more frequent than large ones.
What Attracts Traders to Scalping
Smaller moves tend to happen more times than larger ones, even in a calm market. This implies that there are hundreds of small movements that a scalper can benefit from. A scalper can place up to several hundreds of trades in a day, seeking to make small but numerous profits.
At the end of the trading day, all positions are closed. Scalpers have to be people who can spend hours Infront of the charts, giving it their undivided attention. Scalping demands intense focusing and requires people who are quick thinkers.
Scalping is not for people who are after big wins but those who are after small wins over the long run. The strategy behind the scalping trading concept is that many small wins can become big wins over time. These small wins come by attempts to gain from quick changes in the bid-ask spread. The main focus behind the strategy is opening positions at the ask or bid prices and rapidly close the positions a few points lower or higher to make a profit.
Who can Make a Good Scalper?
People who can make good scalpers include:
- People who like excitement and fast trading
- People who do not mind spending hours looking at charts
- People not patient with long trades
- People who think fast on their feet and change direction or bias at the drop of a hat
- People with fast finger reflexes
- People with jobs that require intense concentration like surgeons
People who cannot make it as scalpers include:
- People who are easily stressed in fast-paced environments
- People who are easily distracted and cannot spend hours on the charts
- People who like to make fewer trades that have higher profit margins
- People who like to take time to analyze the overall market trend, or people who are overthinkers
Factors to consider when Scalping
If you decide to scalp, here are some things to consider:
1. Trade the most liquid pairs only
Pairs like GBP/USD, EUR/USD, USD/JPY, or USD/CHF offer you the tightest spreads as they have the highest trading volume in the market. You need to spread to be very tight as you will frequently be entering the market.
2. Trade during the busiest times of the day only.
Trade only during the times of the day that are the busiest. The most liquid times are during overlaps in sessions, between 2 and 4 am, and 8 am and 12 noon EST (Eastern Time)
3. Account for the Spread
Since you frequently enter the market, spreads are a significant factor in your profits. Each trade incurs transaction costs, and scalping might result in more costs incurred than profits earned. Ensure your targets are almost or double your spread. This enables you to account for the instances the market does not move in your favor.
4. Focus on one pair
Scalping is an intense affair, and if you throw your energy towards one pair, you have better chances at success. Attempts to scalp multiple pairs at once might cost you your profits. If you start getting the hang of things, you can add one more pair and see how that pans out.
5. Follow Good Money Management
Following good money management is standard for all types of trading. However, since you are making numerous trades in a day, it is essential that you stick to risk management practices.
Be Wary of Major News Reports
Trading around major and sensationalized news reports is very risky because of slippage and high volatility. You might see prices go against your trade direction owing to a news report. Be prepared and find out what is coming up by looking at the economic calendar. Because of slippage and high volatility, trading around highly anticipated news reports can be hazardous.
Scalping is not for everyone. If you do not trust yourself to keep an eye on the charts for hours at a time, then this strategy is not for you. Find out what you are good at and evaluate the different types of strategy before settling for one.