Scalping is a type of Trading Strategy where a Trader tries to make a quick profit by making high-volume trades from small price changes. “Scalper” is a term used for traders who use Scalping Trading Strategy for their trades. This type of Trading Strategy is suitable for shorter time frames where traders use 1-minute, 5-minute, or 15-minute price charts for Scalping. Traders try to make multiple small profitable trades daily, accumulate the profit and manage the losses strictly. The trader aims to make a considerable amount of profit at the end of the day with multiple trades.
For fast and timely execution of trades, a Scalper requires a high level of attention and excellent focus with quick decision-making skills. Close spreads, high trading volume, and high liquidity is required in a currency pair or any other security to be suitable for Scalp Trading. For this reason in Forex, traders try to trade major currency pairs of USD with other currencies because dollar-based currency pairs are very liquid and traded with high volume. A Scalp Trader has to make quick entries and exits, where exits are more important as a little delay in exit can result in a loss and eliminate the profits accumulated with many trades. A scalp trader is required to make more winning trades as compared to losing trades to be successful at the end of the day.
How does Scalping Trading Strategy work?
price movements in any currency pair are caused due to high inflow of money from traders or investors. A Currency Pair will move up or down on bigger time frames due to a major event, be it news, fundamentals, or some large investment group taking in or out the money from that currency pair. Whereas small movements in price are taking place every time due to buying and selling of currency pairs. If a trader observes a price chart on any time frame, it can be easily witnessed that the price moves to a high point and low point before closing.
When trading long positions on a bigger time frame such as daily or weekly the risk factor is also high as the stop losses are needed to be placed wider as compared to stop losses on smaller timeframes. Scalpers are certain that the risk factor is higher on longer time frames as compared to the risk on smaller time frames. Generally, a Scalp Trader sets a Target Price when he enters a trade and as soon as the target price comes, he is out of the order quickly contrary to a trading style where profitable trades are continued to run as long as the trend continues. The Scalp Traders apply a strict stop loss and exit the trade as soon as the stop loss is hit contrary to waiting for the price to come back on break even or profit.
Making regular profitable trades in scalping is very important, the ratio of profitable trades should be much higher than the number of losing trades. Whereas in other trading strategies a trader can be still profitable overall even after making less no of winning trades but making good profits on that winning traders.
In Scalping the number of profitable trades versus the number of loss trades is also important and the number of profitable trades should be reasonably higher to make a good overall profit on the trading account.
Scalpers target the currency pairs or any other security for trading that have high liquidity and huge volume which gives them more chances to trade multiple times in a day.
Analysis for Scalp Trading
In the Scalping style of Trading, the traders rely more on technical analysis as compared to fundamental analysis. It takes some time for the prices to move in any direction on the bases of fundamentals, in the case of technical analysis real-time data is interpreted by the traders and the response of currency pairs or other securities is fast when traded based on technical analysis. As Scalp Trading is a quick and fast style of trading where in minutes you can find how much loss or profit has been made on a single or couple of trades, therefore technical analysis is naturally more aligned with the Scalping Trading System.
Scalp Traders start to observe the price action of a currency pair as soon as a new daily time frame starts in real-time. A Scalp Trader typically uses Technical Analysis specifically technical indicators and chart patterns to predict the next movement of the currency pair in the next couple of seconds or minutes. A Scalp Trader sets a low point and high point of the currency pair on the 1-minute or 5-minute price chart to make a range of lows and highs of the currency pair for the rest of the day. These low and high points are useful for making new entries and exits of trades. This method is repeated for the rest of the day to make multiple short and quick trades and accumulate profits.
Benefits of Scalping Trading Strategy
Scalpers can earn huge profits in quick time. They need to devise an excellent exit strategy and with that strategy, they can make profits from very small movements in the currency pairs. Unlike in other trading strategies a trader needs to wait for days or weeks to close the trades.
Scalpers spend their time on technical analysis and chart patterns. Fundamental Analysis in Scalping is not of much importance. Therefore, most Scalpers do not waste their time on Fundamental Analysis.
Scalpers place tight stop losses and cut the losses as earliest as possible. The Market Risk in this case is very low compared to keeping the trades overnight or for weeks.
Scalpers need to make high-volume traders multiple times to earn good profits. Many brokers offer discounted commission and spread rates to Scalpers who are making high-volume trades.
Drawbacks of Scalping Trading Strategy
High Number of Trades
The traders need to make a high number of trades with big volumes resulting in higher costs of commissions and spreads. A handsome amount of profits can be lost due to higher broker costs.
Scalp traders are more attracted to leverage as they need to buy big chunks of currency pairs. If these high-leverage trades go in the wrong direction they can result in huge losses.
Focus on Trading
This type of trading strategy requires a high level of concentration and focus. People having busy schedules and distractions should avoid this strategy. It can stressful and bad for emotional people.
Automatic Trading Robots
Retail and Commercial Traders have deployed Automatic Trading Robots for Scalp Trading. It is not easy to trade against Robot Traders who are more quick and rational.
Scalping is an excellent day trading strategy. If you can concentrate and focus for a couple of hours and implement a strict trading plan you can make profits. Even if the markets are range bound or moving in a sideways direction, you can make profits from short movements in prices in shorter timeframes. Profits per trade are small in scalping as you are making money from small movements but result in good money compounded regularly.