Scalping trading

Key takeaways

• Scalping is a trading strategy that focuses on benefitting from tiny price movements and generating a quick profit.
• Scalping requires a trader to have a precise entry and exit plan since one major loss might wipe out numerous small winnings.
• Scalping requires the necessary equipment, such as a live feed, a direct-access broker, and the endurance to concentrate closely on how markets are behaving.

Understanding scalping

The goal of scalping is to make small, low-risk profits by taking advantage of slight price swings in the market. Scalpers typically open numerous positions believing that many small gains will ultimately add up to a significant profit at the end of each trading session.

The argument for scalping is that minor price changes occur far more frequently in the market than large price movements. A scalp trade is usually closed when the asset price makes a small move above or below the breakeven. Once opened, scalpers are happy to close the trade with a small profit after covering the spread.

When scalping,  both manual and automatic trading techniques can be employed. Manual scalping requires experience and a cool head. This is due to the strategy's requirement for speed, attention, patience, and in-depth trading expertise to hunt for profitable trading opportunities in short periods.

As a result, most scalping activity is generally carried out utilising trading bots (expert advisors), designed to trade the market automatically using programmed algorithms. Scalping greatly benefits from automated trading since it ensures speed and efficiency in order entry and exit. The scalper bots also assure uniformity in strategy application. They also help to eliminate the emotion inherent in human trading. 

What you need to know before scalping

Scalping demands a trader to be extremely disciplined, but it is also extremely time-consuming. While longer trading timeframes and smaller trade sizes allow speculators to move away from their platforms, scalping requires a trader's unbroken concentration.

Potential entries might come and go quickly. Thus a scalper must stay connected to their trading platform. Scalping is not the best trading style for people with day jobs. 

Scalping is a challenging method to put into action. One of the key reasons is that successful scalping generally requires trading repeatedly during a trading session. Scalping necessitates rapid reactions to market fluctuations and the capacity to close a trade quickly if it doesn’t work out as planned. 

Scalpers are frequently unsuccessful due to 'chasing' trades and a lack of discipline. The thought of merely being in the market for a short time is appealing, but the probability of getting stopped out on a price that swiftly reverses is significant.

While some scalpers are regularly successful, they are in the minority. Most traders benefit from a longer-term perspective, smaller position sizes, and a slower tempo of activity.

Pros and cons of scalping trading

Pros

• Scalping exposes you to less risk in the markets.
• As scalping does not rely on large price changes in the market, it has the potential for a trader to book a high number of profitable trades. Because scalping only targets small gains every trade, your win % will likely be higher than other strategies.
• Scalping allows you to take advantage of as many trading opportunities as possible.
• When scalping, you don't need a thorough fundamental understanding of the asset you're trading because trades are based only on basic technical analysis setups.
• There are no rollover or swap fees; only spreads are charged.

Cons

• Scalping is a naturally difficult method requiring significant focus and patience to perform the same task repeatedly.
• Because scalping entails many trades, the spread fees can quickly build up.
• Scalping is time-consuming and requires traders to log a certain number of screen hours daily.
• Scalping is often done with bigger lot sizes. This implies that a string of losses might significantly hurt trading capital.

The essential elements of the best forex scalping strategies

Any Forex scalping technique focuses on specific market moves and depends on having the correct tools and discipline to capitalise on them.

Here are some of our top scalping trading essentials to keep in mind.

Risk management

Because the gains from scalping are often small, practically all scalping methods employ higher-than-normal leverage. While leverage can increase gains, it can also increase losses. As a result, risk management is critical. 

High leverage is especially dangerous during news releases when markets get volatile. The spreads tend to widen in such situations, unless trading with a provider offering fixed spreads. To avoid this, always utilise an adequate leverage ratio while scalping and traders should never trade more than they can afford to lose.

Trading outside of your comfort zone often has negative financial consequences. 

Self-control

Scalping strategies need a certain amount of mental strength. Traders must be able to manage their emotions, remain calm, and maintain their composure in order to profit from scalping. Emotional responses might lead to poor trading decisions resulting in losses.

Market conditions

Market conditions are very important as they can impact profitability when scalping. As a result, scalping is often carried out under challenging market circumstances.

Setting goals

Traders should first identify their realistic goals in order to find the finest strategies. Of course, the goal of traders entering the market is to profit. When trading using scalping, keep in mind that profits will be limited.

Whatever trading style a trader picks, they must ensure that it suits them and that they are comfortable with it. Any effective scalping trading system must have a well-planned, disciplined, and adaptable strategy.

Scalping trading strategies

Stochastic Oscillator

A stochastic oscillator can be used as part of a  scalping strategy. The word stochastic refers to the present price's position in relation to its recent price range. Stochastic indicators help to highlight possible turning points by comparing the current price of a security to its recent range.

Scalping using such an oscillator seeks to capture moves in a ranging market, i.e., one that moves up or down consistently. Before a turning point occurs, prices tend to close at the extremes of the previous range.

The five-minute chart below shows a chart of EURUSD where the stochastic lows give entry possibilities for long trades when the green line crosses over the dotted red line. When the stochastic hits the upper end of its range, over 80, or when the bearish crossing emerges, when the red dotted line crosses below the green line, this signals that the long position should be closed.

On the other hand, short positions would be employed in a downward market, as seen below. Instead of 'buying the dips,' we're selling the rallies.' As a result, we will watch for bearish crosses in the trend's direction.

Scalp with moving average

Another way is to use moving averages to identify the trend, generally with two very short-term ones and a considerably longer one.

On a five-minute EUR/USD chart, we use 20 SMA and 50 SMA (simple moving averages) for the short term and 100 SMA for the long term. As you can see in the below chart, we get a sharp rally once 20 SMA and 50 SMA crossover 100 SMA.

In the chart below, all the moving averages have turned lower, with the shortest leading the move. Therefore, we look for opportunities to sell when both the 20 SMA and 50 SMA cross below the 100 SMA. That provides us with a potentially bearish set-up.

It is critical to note that these trades follow the trend and that we are attempting to capture only some of the move. 

Relative strength Index (RSI)

Traders may utilise the RSI to identify entry positions corresponding to the current trend. Dips in the trend should be bought. Therefore, a suitable buy position can be opened when the RSI falls below 30 and then rises back above this line. In contrast, an opportunity to sell is formed when the RSI reaches 70 and begins to fall back.

Tips for scalping trading

Most traders scalp using time frames ranging from 1 to 15 minutes. While there is no "optimal" time frame for scalping, the 15-minute period is the least popular among most scalping tactics. The most popular periods are one minute and five minutes.

When choosing an instrument to trade using the scalping technique, it is critical to choose a heavily-traded, volatile market so that you are more likely to witness significant price fluctuations.

It is generally advised to utilise stop-losses (SL) and take profit (TP) limits while trading. Scalping may be an exception, as many scalpers tend to enter and exit positions manually, which means they will close the position when they reach the maximum tolerable loss or the intended profit rather than setting automatic SL or TP levels.

It is critical to select a broker that supports scalping and provides Straight-through Processing (STP) or Electronic Communication Networks (ECN) in their trade execution.

Final thoughts

Scalping may be quite beneficial for traders who use it as their primary technique or to supplement other trading methods. A tight exit plan is essential for compounding small gains and turning them into significant returns. The shorter market exposure and the frequency of small but tradeable price moves are crucial characteristics that explain why this technique is popular among many traders.