What is scalping?
The scalping can be defined as a very effective (but also risky) trading technique which has become one of the most popular strategies in recent years. It is also known as “Quick Trading” and is one of the most effective trading strategies used in highly liquid financial markets such as Forex. Scalping is a series of short term operations (buy and sell fast trades) over the trading session, which can reach even the hundreds of daily trades with ease. In this case, it involves transactions that may take 1-2 minutes on average and sometimes even a few seconds.
The scalping is classified as an intraday trading technique, ie transactions whose duration is less than a day and can last from several seconds to several hours. Through the scalping, a human trader can make up to 20 or more buy or sell buy and sell trades in an hour to profit from micro-movements of the market. Automated trading systems based on computers are capable of a much larger number of scalping operations per day.
In this case, what the investor seeks is to ensure is a small profit on each short term transaction so that the sum of the earnings of multiple scalping a significant overall gain. For example, if we win on average $10 for each scalping operation, we need to make a total of 10 000 trades to obtain $1 million if that is our goal. Although the risk associated with each scalping trade is low (the stops are tight), this trading technique has the same risks as any other when it is used to trade. This is because a lot of short term losing trades can add many losses equal to or greater than those produced by longer-term trades.
Generally, scalping is not employed by conservative traders or by those who suffer from too much stress on each transaction because they do not have good control of their emotions. This is because it involves a lot of stress throughout the day for which only those who know how to cope with that stress can trade successfully using the scalping.
Purpose of scalping
As noted above, the purpose of scalping is to allow the trader to achieve immediate small gains immediate in short periods which can be of a few minutes or even seconds. Some expert traders claim that scalping could be a highly reliable trading strategy with a success rate that can reach up to 85% of winning trades. Due to the short duration of each transaction, the gains are quite low, but so are losses.
Through the scalping, the trader is seeking to make hundreds of small transactions daily to get small profits with them An important aspect that must consider every trader interested in the implementation of this strategy is that these trades are performed continuously throughout the day or the market session in which the investor wants to trade. For this reason, the trader surely must be sitting in from of his computer for several hours, as he will be opening and closing positions constantly.
Another point to consider is that to succeed using scalping as a trading technique, the trader must invest more money on each transaction than it would if you used other strategies such as swing trading, so that earnings though small, can be significant.
How does scalping work?
While the concept of scalping is simple, we can understand it better with an example. For example, let´s suppose that we make a fast transaction buying a lot (100 000 units) of EUR/USD at 1.4000 and closing the position at 1.4003. In this case, we obtain only 3 pips, but by negotiating with 100 000 units, each pip represents a profit of $ 30.00, which we obtained in just a few seconds. Now, just imagine that we make 40 successful trades of this type in a day which would give us a profit of $1200 a day which is a very good profit, of course, not all scalping traders are winners since in those intervals of time the market often behaves very erratically.
Currently, many professional investors trade using the scalping as their main trading technique, doing multiple transactions with large amounts of money at every position, so that by day’s end the earnings accumulated can be quite significant.
To apply successfully scalping, it is necessary to take into account three key factors when trading:
- The level of liquidity in the market: A market with high liquidity levels provides greater opportunities to the trader to open and close successful operations in any timeframe. Because scalping requires fast executions (the delay in executions may cause losses), we need a market whose liquidity makes this possible. For this reason, the Forex market is the best to trade using scalping strategies, since it is the most liquid worldwide.
- The volatility in the market: The more stable the market is, the more opportunities there are for a trader to successfully use scalping as it is easier to find the right time to enter and win money with a trade. A market that shows stability, offers better trading conditions to make money with short-term trades because a more volatile market is too variable and can easily cause losses to a scalper.
- Time: In scalping the timing is everything and in fact, a trader who successfully employs this technique does not always start trading when the market session begins, for example. First of all, a scalper must be patient and find the right time to open a position in the market.
Advantages and disadvantages of scalping
- Generally, scalping operations are highly reliable due to its short duration. There is less room for something to happen in the market to make this move against us.
- It is not likely to lose investment capital in one trade.
- Only small losses occur in each operation.
- The risk associated with each operation is low because the stop loss used are used very tight
- It presents many opportunities for profit in one day.
- Each trade offers small gains.
- The scalping produces high stress and high psychological pressure.
- The scalping depends directly on the effectiveness of the system that is used to trade.
- The trader must be able to perform operations very quickly, ie to know how to open and close positions in seconds.
- Compared with other trading techniques, the transaction costs of scalping are much higher especially in items such as spreads or commissions due to a large number of operations performed per day. This means that transaction costs should be taken into account by the scalper when analyzing the performance of their trading system. For operators who employ long term trading strategies, these costs become insignificant.
Final considerations regarding scalping
- If the market is following an upward trend, the trader should make only buy transactions, but if the market is in a downtrend, the trader should make only sell transactions.
- To get the best results, the trader should use several technical indicators at a time.
- Scalper traders should buy at the bid price (bid) and sell at sell price (ask) continuously.
- The trader always must use clear limits for making profits or limit losses (loss stops.)
- The trader must be quick while he is trading, especially to take profits.
- In scalping, the trader can use any strategy based on the breakout of support and resistance to make in and out fast trades.