Scalping is one of the most popular trading approaches among both beginners and seasoned traders. The reason is the relative simplicity of this method and quick results. Scalping is a style of trading where small profits are prioritized, which means that traders make multiple short deals with small investments, instead of holding big trades over a long period of time. Why is the scalping strategy one of the most favored trading styles? Let’s find out.
How does scalping work?
The idea of scalping is to benefit from the first stage of a trend, entering the market when a trend is emerging, and locking the profits before a pullback. Scalping delivers results by increasing the number of deals while sacrificing the size of the returns. The goal of a scalper is to generate significant outcomes over multiple short trades with small profits.
Scalping strategy can be applied on Forex, stocks, commodities or crypto currencies. It is usually performed intraday, which means that trades are never left open overnight. One trade normally lasts from several seconds to several minutes and traders make dozens of deals in order to reach the desired goal.
Scalping strategy advantages
In comparison to trades on long timeframes, scalping has several pros:
- Smaller price moves are more frequent and easier to catch. There are much higher chances for an asset to make a $0.50 move than a $10 move and the time required for it will be much less;
- The trades require much lower investment, which makes scalping more accessible to entry-level traders;
- Quick execution, faster results;
- No overnight fees and extra costs.
Scalping strategy disadvantages
While it has its advantages, there are some factors that traders need to consider before trying scalping.
- Scalping requires precision when it comes to opening and closing trades. It is extremely important to carefully execute the trades as bad timing can wipe out results;
- If leverage is used, it may increase the potential risk in case the trend goes against the trader’s prediction;
- This approach is suitable for traders with strong self-control, since it requires fast decision making and constant attention to the traderoom;
- Very strict exit rules have to be applied in order to manage the risks.
How to use scalping in trading?
Building a successful scalping strategy on Forex or any other instrument requires some time and patience. First of all, it is necessary to remember that big profits are not the goal of this approach. There is no point in waiting for the investment to double or triple — it might lead to unsuccessful results.
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Scalping can be used as the main strategy on its own, or combined with other approaches. For example, some traders pick an asset and open a long-term trade. At the same time, they use scalping to take advantage of the small pullbacks to maximize their returns. Nonetheless, this requires some experience with trading and should not be attempted by complete beginners.
Technical analysis and scalping
Traders that favor the scalping strategy usually implement technical indicators to analyze the chart on short timeframes. Decisions have to be made within seconds, so long-term analysis tools (like following the news) will not prove useful. Most often traders choose candlestick or bar chart types to distinguish small price fluctuations better.
The choice of the indicators is entirely up to the trader, since there is no one size fits all in this matter. However, the general idea is to follow the trend while also keeping an eye on the volume. For this purpose, a combination of a trend-following indicator like the Moving Average or RSI with a volume indicator (for example, ATR) may come in handy.
Conclusion
The scalping strategy is a popular approach among those who prefer intraday trading. It allows traders to generate wealth over a large quantity of deals with small results. While it has its downsides, it is relatively easy to master and can be suitable even for novice traders. However, risk management rules should not be overlooked: scalping is quite risky and requires a lot of practice before it might start bringing positive results. Utilizing a practice balance at first might be advisable for all traders that wish to master the scalping strategy and improve their overall trading skills.
