There are a lot of trading strategies on the Forex market. Let’s consider one of them – scalping. I don’t state that this is the best one. It’s just one of most popular trading strategies. Perhaps, you’ll find something interesting in it and try to trade in such a way.
Scalping: definition and essence
Scalping is a kind of a trading strategy on the financial market. It consists in the fact that a trader makes a lot of short-term transactions in a day. These transactions may last 5 minutes, 2 minutes, or even 20 seconds. Thus, the trader tries to get a small profit in each transaction. Traders who are engaged in short-term trading are called scalpers.
The price on Forex is unstable, it is constantly fluctuating. Even when there is some definite trend (upward / downward) the price jumps within it. A scalper does not think about what the trend will be on the market in a few days, he does not use technical analysis, he is not interested in the news and political events. The scalper doesn’t care too much of the state of the market. He’s just trying to catch the slightest movement of the price and get profit from it. The profit for such a deal is very tiny, but the scalper can make up to 100 such transactions per day, and the amount of profit turns to be significant.
All traders can be compared to major manufacturers. Some of them conclude contracts with shops for long periods and provide them with goods in bulk in large volumes. And others, like Forex scalpers, prefer to sell one product at retail. From one sale they get a little profit. But a month later it is clear that the sales go on and income flows.
Traders use scalping, watching the short-term charts – M1, M5, M10 occasionally. Often, in order to earn as much as possible, scalpers use high leverage – 1: 200, 1: 500 and higher. They also open positions with large volume, but the risk, in this case, is significantly increased.
Types of scalping
Each scalper has its own tactics. There can be three kinds os scalping tactics defined:
Playing on time
This type of scalping involves trading in the most appropriate time. Traders expect the best moment for the opening of the transaction, quickly collects profit and closes the deal. This tactic can be of several types, for example:
The game at the breakout. The trader expects first when the breakout is formed, which will move the price. Once the breakout occurs, the trader opens a transaction, the price starts to move up, for example. Once the scalper sees profit in a few points, he closes the deal. Sometimes such a transactions last less than a minute.
The breakout means that the price reached the level of support/resistance and continued to move in the same direction, but did not turn in the opposite direction. That is, the price goes beyond a certain level.
Ten o’clock shakeout. It often happens that the Forex market observes a series of quick movements. Typically, this happens from 10.00 to 15.00 NYC time. On such movements the scalper tries to earn a “pretty penny”.
Against the trend
As a rule, the scalper uses this method in the last hours of the trading session. Exactly at this time traders who traded with the trend all the day, fix their profits. As a result, the price may move in the opposite direction. It’s time for the scalper to seize the opportunity. He opens transactions against the daily trend. Often, such techniques like candlestick charts are used, with the help of which the scalper follows the reversal. Profit can be 15-20 points.
With the trend
Working with the trend the scalper opens short positions in the direction of movement of the market: if the market grows, he buys for a rise, if falls – sells short. This procedure is also divided into subspecies:
Scalping with pullbacks. The scalper enters the market again when there is a pullback. The pullback can be followed on the candle chart using moving averages. As a rule, it is observed on 5-minute or 10-minute chart.
The pullback means that the trading price of the instrument changes its movement in the opposite direction: that is, if it grew up, she turns around and starts to fall. This happens usually when the trading instrument is overbought or oversold on the market.
Anti method. This technique involves the use of indicators. Most commonly, scalpers use stochastics and moving averages. The 5-minute candlestick chart is taken. When Stochastic crosses the moving average with a period of 10 upwards, the trader buys. If the Stochastic crosses the middle line down, it says that one should sell.
Will you be able to become a scalper?
The scalping strategy seems at first glance to be quite simple, but actually, requires a lot of effort.
You can become a scalper if:
- you like “fast” trading;
- you like to experience the excitement;
- you like to follow the clock schedules;
- you are an impatient person and you do not like to wait for the result of long transactions;
- you can quickly change the thinking and direction of transactions;
- you have a well-developed fine motor skill.
You can not be a scalper if:
- you can not sit in front of a monitor and follow the charts for a few hours;
- the rapidly changing trends annoy you;
- petty profit ruffle your temper;
- you like to analyze the situation on the market as a whole.
What you should know?
If you have already decided to do short-term trading on the Forex market, we offer you a few tips on how to become a successful scalper:
- Be careful and plodding. The scalping strategy needs special attention from you. It takes a lot of time. Therefore, if you are not ready to throw yourself into trading according to this method, so do not even start this. Do not tradе with scalping if you have an important job which you can not neglect. Scalping is work.
- Be of iron nerve. Scalping is a very nervous strategy. Therefore, if even a slight loss can yank your chain, it is better not to trade in such a way.
- Do small investments. Start trading with small amounts. You’ll practice in such a way, learn to see slight tendencies and where is better to open a transaction. Scalping seems to be simple at first, but it also requires experience.
- Choose the right broker. Some dealing centers prohibit scalping strategy. So while choosing a broker ask him does he allow such a strategy.
- Manage the risks. Not only traders, opening long transactions, should consider the risks. The scalper opens daily from tens to hundreds of transactions. They all are hardly profitable. So the scalper should manage risk: control emotions, take into account the percentage of loss, put stop orders (Take Profit, Stop Loss).
- Choose a good time. There are time periods which are the most successful for scalping. See below.
Advantages and disadvantages of scalping
Scalping is quite risky, but not without its advantages:
- scalping provides daily income;
- there is no need to study the technical and fundamental analysis;
- you do not need a large deposit to start;
- scalpers earn the profit at any time of the day or night;
- small losses from one transaction.
As for disadvantages:
- not always a trader can guess where the trend will go;
- many brokers prohibit scalping;
- permanent work in front of the monitor;
- a strong nerve strain because of the high risks, emotional burnout;
- high leverage can destroy a deposit.
Weigh all the pros and cons before trading with scalping. Good luck to you in trading on the Forex market!