Scalping strategy and what exactly is that?
Forex scalping is the trading method by which the trader makes quick and small profits by opening and closing new positions within minutes. A scalped trade can remain open for three to five minutes, with the majority of such trades staying open for as little as one minute. Scalping is a popular trading method primarily because the inherent risk of Forex is minimized when scalping. Since trades are only open for a minimal amount of time, the danger in a fluctuating market is much lower than in traditional trading methods due to a lower level of market exposure.
While day traders are focused on concepts like trends and ranges, a scalping strategy focuses only on the bid-ask spread. The volatility of the Forex market, therefore, affects scalpers less than a trend follower or day trader.
Is there a profitable scalping strategy for any trader?
Scalping is most definitely not a suitable trading method for the majority of Forex traders. The profits made from scalping are understandably much lower, and the scalper depends on many small profits as opposed to making it big with one specific position. The scalping technique lowers your risk as a trader, and on the flip side, lowers your potential for great profit. When all of a scalper’s small profits are combined, is where they make their money.
Taking human nature and accepted trading psychology into account, the scalper has to be a patient and diligent individual who is willing to forego the desire for instant gratification and wait patiently while their trading account grows. An excited and impulsive person will achieve nothing by scalping, in fact, their blood pressure and frustration are sure to increase.
Here are some examples of a very simple scalping strategy using the 200 SMA combined with the Stochastic Oscillator
The “Brokers Hate Scalpers” myth
First of all, let’s consider this venerable myth that has been publicized over the internet on both forums and blogs dedicated to forex trading. The argument of the propagators of this myth goes as follows: “Scalpers take little risk using a scalping strategy and are often successful. In order to hedge their positions, forex brokers counter-trade their clients, with the consequence that if a trader makes a profit, the broker, by counter-trading his position, suffers losses. Of course that makes brokers hate scalpers.”
Let’s first state that no forex trader will do himself any good by making real, or imagined enemies of brokers. Regulated brokers are monitored by authorities, and most of the firms in the business are legitimate actors with decent practices. There’s no way of trading the market without brokers (or ECN’s, but they are not used very often, and have their own disadvantages). And there’s no logic or merit in demonizing brokers as crooks or thieves. We, as traders, want to trade the markets, and to do that we need the services of firms which are monitored and regulated by the authorities.
In previous sections we have already discussed how brokers hedge against client losses, and noted that a majority of client positions can be netted out against each other without the broker having to commit any funds. In fact, when such matches can be found, the broker does not even need to pass the buy or sell order client to the bank: all that it must do is matching the order with another customer’s opposing order while pocketing the commission, and assuming zero risk. The problem with scalpers arises because their rapid entry/exit orders make the task of hedging hard for forex brokers with slow servers or outdated software. When they can’t do so, they get nervous, become worried that the scalper is trying to manipulate the system (exploiting latency issues, as they are called), and sooner or later terminate the forex account of the scalping trader.
There are no statistics on the success ratio of scalpers, but there is no reason to assume to their success rate is any different from that of the overall market. Indeed, scalping is a demanding, and somewhat more sophisticated trading style in comparison to day-trading, or swing trading; there is no reason to expect that beginners will do better in scalping in comparison to their performance in these other trading styles.
Our analysis is confirmed by the public statements of many forex brokers present on websites and blogs throughout the web. The majority of established brokers actually have the stated policy of allowing scalpers to open or close positions in as short a time period as they desire. What is more, since scalpers trade much more frequently than regular traders, they are a good source of revenue for any kind of forex broker. No broker with an updated software and platform would be willing to deny scalpers the style which they like most unless he wants shrink his own business.
How to Identify the Trading Possibilities in Forex
Another characteristic that is necessary for successful scalping is a high level of concentration. While some day traders might open a position, go out to eat, then come back and close the position based on the latest market developments, the scalper must be concentrated on their open positions at all times, and have their finger on the trigger, in preparation for their next move. It requires a serious attention span as well as the ability to stay glued to one screen for an extended period of time.
If you are not a full-time trader and do your trading on the side, you must realize that scalping is a time-consuming technique that might not be suitable for your schedule. There is always the automatic trader’s option. A trader that feels that scalping is the right method for them can also consider semi-automatic scalping systems.
With such a tool, your scalping would not require you to stay glued to your screen full time, but would still require a high level of attention.
Is it a good idea use a scalping strategy trending markets?
Many traders favor scalping in strongly trending markets. This approach is defended on the basis of the notion that scalpers thrive in volatility, and that trends cause a great deal of volatility creating many trading opportunities. But is this idea justified on the basis of facts and analysis?
Let’s first remember that using a scalping trading strategy, one misplaced, carelessly created trade can wipe out the gains of tens of successful trades in a short time. A scalper needs consistency above everything else. Discipline in trade sizes, take profit, and stop-loss orders, and a degree of skepticism towards arising opportunities are important components of a successful trading strategy. Let’s ask ourselves, then, which kind of markets offer the best conditions for the implementations of these principles? Would scalpers thrive in strongly trending and volatile markets, or quiet, calm markets where activity is subdued and volatility is low? Naturally, the best conditions will be found in the latter. Calmer markets allow us to exploit small fluctuations over a long time with little risk and good profits. Trending markets move rapidly, with widening and contracting spreads, where exiting a position before it reaches its full potential can be dangerous, and maintaining a calm and composed attitude is an additional problem.
We read online that scalping is best in strongly trending, liquid, volatile markets, and some of us wonder why so many people subscribe to these beliefs. This attitude is present either because the traders who write the articles don’t have that many experiences in scalping or because they use scalping strategies on a trend following scheme. The latter approach is not very useful to beginners, however, because they mostly choose the scalping style to make quick profits without worrying much about analysis or strategy.
The Importance of Consistency using a scalping strategy
Forex trading, in general, requires consistency on the part of the trader. This is magnified when it comes to scalpers. Trading unpredictable size positions will inevitably lead to a closing of your trading account. The scalping method, after all, is based on the principle that your small profits will overpower your losses. This will not necessarily work if you open large trades, and lose.