Scalping is a trading strategy where a trader opens and closes a position within seconds or minutes, capturing fast pip movements. Traders aim for small but quick profits, so scalping is done multiple times a day to achieve a sizable profit. Read More
If you want to implement scalping, make sure the following conditions are met:
1) Choose a volatile currency pair with short price movements. Traders choose major pairs like EUR/USD, USD/CAD, etc. Their pip movements are small, making them perfect for scalping, and you can quickly convert pip value in your account’s base currency with the help of pip calculators. This will show you the total profit you would make from a trade.
2) Ensure that your broker offers small spreads and commissions. Otherwise, the cost of the trading would be high.
3) Do scalping when there is liquidity to avoid slippage.
Scalping demands quick thinking and decision-making, making it one of the most difficult and profitable trading strategies. Moreover, you should have a clear idea of your goals and profits you want to achieve from your trades.
Now let’s unearth some important scraping techniques and the pros and cons of using this strategy.
Scalping Techniques in Forex
Like every other forex trading strategy, you can do scalping in two ways: manual and automated. You need to have a firm grip on technical analysis because that’s what comes into play in scalping. Another thing to keep in mind is the margin requirement because you can’t use a margin that is too high or too low. The margin should be enough to make decent profits. To find the right margin according to your capital, you can take the help of a margin calculator that provides you with accurate margin details in seconds.
Traders who get into scalping build their strategies on demo forex accounts. After testing a few things, they go and apply it to live trading.
Since scalping is a time-intensive trading activity, traders eventually replace their manual strategies with automated trading. This helps them not only implement strategies more quickly, but they can get the best of the opportunities in their absence. Expert Advisor Robots, or automated bots, take over this task.
Traders can create their bots, giving them the functions and tasks they should perform. However, not complete control is handed over to bots. You still have the power to intervene and trade manually whenever needed.
Scalping Indicators and Strategies
If you want your scalping strategy to give better results, you can take the help of indicators. They are tools that provide a clear picture of the market and its trends. Below are some of the most important indicators that scalpers could use in their strategy.
- Moving Averages (MA): Moving Averages can smooth out price data for traders. This can help them identify the direction of the trend. They react, especially short-term MAs, quickly to price changes, and you can use them to confirm your trends.
- Relative Strength Index (RSI): With RSI indicators, forex scalpers can learn more about overbought or oversold conditions. Not only this indicator can help you identify these two conditions, but it can also give you an indication of a potential reversal in price. This information can exit or enter your trade on time and avoid risk.
- Bollinger Bands:Comprising two elements —a middle band (SMA) and two outer bands— gives you information about the market’s volatility. When the price touches or is above the outer bands, it signals potential price extremes. As a result, traders can find out the conditions suitable for reversals or continuations.
- Stochastic Oscillator:Do you want to know the strength of a trend? Then you should use the Stochastic Oscillator. Along with identifying overbought or oversold conditions, this indicator gives traders the strength of a trend and pinpoint potential turning points. So traders can make timely decisions.
- MACD (Moving Average Convergence Divergence): A trend-following momentum indicator — MACD tells traders two things about a trend: its trend and direction. When using this indicator, look for MACD crossovers. It is when the MACD line crosses the signal line you can expect the trend to change.
Is Scalping Beneficial for Novices? Tips for Rookie Scalpers
Before using any new trading strategy, a trader should always check whether it fits well with their trading style or not. It works best for those who can make quick decisions, have control over their emotions, and have a tested exit strategy.
However, new traders be careful when using this strategy. To lock out tiny profits, you should scrutinise the markets, assessing changes in them from time to time.
Below are some scalping suggestions for beginners:
- Order placement: A new trader should place orders strategically, from opening to closing trade. A delay of a second in your order could lead to drastic results, putting a full stop to the growth of your trading account.
- Frequency and expense: As mentioned in the beginning, scalping is a process of taking trades multiple times a day, but keep in mind that every time you open and close a position, a commission is charged by the broker. So, if you scalp multiple times a day with some of the trades being profitable while others ending in losses, then you will have to pay the commission for all the trades. So, you need to plan the number of trades you intend to take in a day in advance and stick to that plan.
- Trading Direction: Scalping can be done in different ways. You can go with the trend or go against it. It’s up to you. Momentum and trend trading have been helpful for trades. Combining such strategies with scalping helps traders in joining and exiting the market quickly.
- Trading Time: Although the time frame for scalping is short, you should be trading in long intervals. Some traders are in and out of their trades in seconds. As a new trader, you will find doing this hard. So stick with a longer timeframe. Take 5 minutes. or 10 minutes.
Try to learn and slowly reduce the timeframe as you understand the market well and get better at winning from shorter price movements. - Technical evaluation: You should know your indicators and charts well to place successful trades. If you fail to understand technical analysis, you will have no growth. Instead, you would be gambling with your trades.
- Volumes: Scalpers should place multiple trades. How much? It depends on their daily goals. So execute multiple orders in a brief period; however, do not overdo it. If you decide to open 10 trades a day, do not go for an extra.
Positives and negatives of Forex Scalping
Like many other trading strategies, scalping, too, has its good and bad. Some traders view it as a “perfect” strategy to accumulate large profits with multiple wins over time. However, other traders think its fast-paced nature to be risky, throwing trading at the mercy of the market, which could play against you at any moment.
The difference in the views comes from the pros and cons of this strategy.
Here are a few of them that you should consider when deciding whether to go with this trading strategy or not.
Pros:
- Scalping gives traders the potential to make money, like any other strategy. Though you would have to make multiple, tiny trades, if you do them well, you can accumulate decent profit at the end of the day.
- Scalpers have more flexibility than other traders. You do not have to sit back for long hours, waiting for a trade to close, questioning whether what you are doing is accurate or not. Why? Because you can open multiple trades with scalping. If one trade does not work out well, you can open another.
Cons
- This strategy can turn out to be dangerous for traders if they do not have a sound plan for risk and money management. Scalpers use leverage to boost the potential of their trade. However, if they use excess leverage, traders can expose them to much greater risk.
- Moreover, the dearth of time in the hands of scalpers makes this strategy overwhelming. If you are unable to make quick decisions, you are likely to lose a trade.
Final Thoughts
Whether scalping is for you or not depends on your trading style and approach. Are you someone who enjoys fast-paced trading without losing your cool? If yes, then this strategy can be helpful for you. Though this strategy can be more stressful than others, you can get better rewards from scalping than day trading or other long-term strategies.
To maximise their earning potential, traders who use scalping often engage in leveraged trading, which helps them spike up their earning potential. While with other strategies you can open limited trades, you can open dozens of trades with this strategy. Even if you fail a few, you can still cover your losses, which would be more difficult in other strategies where you open fewer but larger-sized trades.