Forex trading is known for its dynamic nature. Markets, prices, and trends can change in the blink of an eye. However, in this change, many traders have crafted a niche of opportunity for themselves. Capitalizing on short-term price fluctuations, these traders make a huge amount of quick trades to make small profits that they hope to accumulate over time.
This strategy is known as scalping. This article is going to break down what scalping is, what it entails, what is required to be profitable, and how you can get started.
Scalping can be defined as a trading style or strategy used by day traders to take advantage of small price movements and changes to buy and sell currency pairs with a very brief holding time between them both. In other words, these traders use real-time technical analysis tools such as 1-minute (M1) and 5-minute (M5) charts to identify what is called 'micro trends' on which they can open a position when one starts and close that position when the market begins to go the opposite way.
The main goal of scalping is to make small profits from these short, numerous trades during the day. Scalping is the opposite of position trading, where traders try to make huge gains from taking long-term positions on currency pairs. It is also very different and mentally taxing compared to day trading, as it requires opening and closing trades at a very fast rate, and scalping traders never plan to leave a position open overnight.
Usually, the profit a trader can make from each scalp trade is around 5 pips to 20 pips, and the losses are around 0 to 7 pips. This is why scalp trading has to be done in a huge volume of trades to make a substantial amount, or by increasing the position size of each trade to make more per trade.
Scalping is not just about executing a huge number of trades in record time, just as Forex trading is not just about buying low and selling high. It is a strategy that demands a high understanding of the market and technical analytics on one hand, while also requiring strong mental or psychological and financial discipline, crowned by risk management.
Below are some of the core elements of scalp trading that aren't mentioned above:
Scalping is known for the short-term span of any trade taken. This is because the aim of these trades is the small price movements and not any long-term goal. Trades usually last for a few minutes or even seconds. Sometimes they are so fast that they are automated and not humanly possible.
Scalpers target small profits. The whole strategy is based on the fact that multiple small wins can be combined into a big profit. To make something worthwhile, the frequency of their trades is high and sometimes the position size of the trade is increased.
As a result of the small gains that each trade brings, to make a huge amount from scalping, traders have to make multiple trades, sometimes even simultaneously.
Using a combination of technical indicators, such as RSI, moving averages, or time and price to identify potential entry and exit points, is non-negotiable. Without this, they are no longer trading but gambling. Technical analysis skills must be top-notch.
Other elements include constant monitoring of charts and trades, exploitation of high market liquidity, superb risk management skills, and continuous practice.
It's important to note that scalping can be done manually or it can be automated. When automated, programs are set up to interpret certain signals and then initiate a buying or selling decision on the trading software.
This is a question that almost every trader asks themselves sooner or later when they get to know of the scalping strategy in Forex trading. Before moving any further, you must know that there are profitable scalp traders out there. So yes, it is profitable. Stopping there, however, would be a great half-truth, so it is important to discuss both the pros and cons of scalp trading and then allow you to make your own decision.
Because of the low risk involved, it is easy to have a streak of gains accumulate over a long period. That's why the strategy is still attractive today. And with a high frequency of trades daily, you can rack up a huge amount of profit.
Traders that use this strategy focus on high liquidity currency pairs, enabling ease when buying in and selling out. Ironically, the strategy itself also contributes to the liquidity of the market.
Scalping forces the trader to acquire skills if he/she wants to be profitable. Notable among these is adaptability to market conditions. This is an important skill in any form of Forex trading.
Overtrading is a mental state where a trader, in an attempt to regain a loss in a current or previous trade, throws caution to the wind, thereby losing all sense of risk management.
Not all trades will go well, and successful traders realize this, but because of the high number of trades that must be taken before you can accumulate a reasonable amount of profit through scalping, they are at more risk of overtrading.
A high frequency of transactions equals a high amount of transaction costs or charges. While the cost for each trade may not amount to much, the cost accumulates over time, whether the trade ended in a profit or a loss. These costs can swallow up any profit made if not effectively managed.
Scalping requires a sharp mind for quick decision-making, attentiveness to detail for constant attention, and emotional detachment for risk management. The toll of all that for multiple trades per day is not only challenging but impossible for some traders. Once a trader lacks any one of these, mistakes and losses are near.
With low barriers to entry and requiring less market knowledge and more alertness, it is a good opportunity for newbies. However, Forex trading, no matter the strategy, isn't a get-rich-quick scheme.
Scalping, when done right, can be very profitable, and there are many traders using this strategy who are making it work for them.
The perfect time is when the highest volume of trade and liquidity overlap. For London (08:00 - 17:00 GMT/BST) and for New York (13:00 - 22:00 GMT/BST). Calculate that time in your own country's time zone; that's the perfect time to start scalp trading.
