Scalping is the name given to a forex trading strategy that involves taking small and rapid trades throughout the day often just involving a handful, or even just one or two, pips. The idea behind scalping is for traders to focus on the low timeframes such and the 5, 3 and 1 minute charts in order to spot opportunities to take a small number of pips form the market in a very short space of time. Whilst these techniques may appear to favour those who are impatient and need to be actively trading throughout the day, successful scalpers demonstrate a high level of skill and discipline in their trades. Fast moving and nimble fingered, scalpers often trade similar chart formations and strategies to longer-term traders but apply these to the fast and potentially erratic lower timeframes. Since their exposure to the forex market is generally only a few minutes on each trade, scalpers often argue that their overall risk is lowered compared to swing traders who employ large stops.
Why do scalpers trade forex?
Scalpers are a forex trader who support the notion that little and often is better than one big win every now and then. Those who scalp are looking for consistency over the belief that a trader can lose many more trades than they win provided that the single winning trade counterbalances the losses. Scalpers also do not employ large stop losses and therefore they need to be confident that the positions that they enter have the momentum to rapidly earn them the handful of pips. The reason that these traders exist is that scalping can become a highly successful and profitable way to trade the markets provided a trader can demonstrate highly-disciplined stop and profit targets. Forex markets are also idea for scalping as they provide a high level of both momentum and liquidity which are very important to enable traders to move in and out of positions without a problem.
What to look for as a scalper?
Scalpers have a tendency to hold a position for just a few minutes, or less, depending on the speed that the market is moving. Ideally, because scalping only requires a trader to obtain a small number of pips, the favoured forex pairs are going to be those with the lowest spreads. Low spreads mean that price has to move fewer pips in order to achieve its profit target, and pairs such as the EUR/USD are ideal with typically some of the lowest spreads of all currency pairs.
Another important aspect to scalping is to have a tried and back-tested strategy to follow, including strict entry and exit rules. The discipline to be able to follow the rules of the strategy is as important as the technique itself and the application of tight stop-losses makes the probability of momentum in the trade particularly important. Whilst swing and day traders can accept that prices may move higher and lower, employing wider stop-losses to take account of these, scalpers cannot afford to endure large losses. Such losses would make their profit:loss ratio impossible to sustain even for a very good trading strategy.
Automated trading and scalping
Many automated trading systems use a similar technique to scalping, as many strategies are rule-based and ‘mechanical’ in their entry and exits. Successful automated scalping strategies are, however, difficult to come by on the commercial market. Those to avoid are clearly those that claim to make very large profits “whilst you sleep”, or similar. Nevertheless, one of the benefits of the relative simplicity of automating a scalping strategy is that this makes it very straightforward to test over a longer and more diverse period of time. Whilst a sensible trade size is central to scalping with success and maintaining a positive account after incurring losses, a comprehensively back and forward-tested scalping strategy helps traders to optimise many important parameters including trade size, time of day and throughout different market conditions.
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