Scalping is a popular, ultra short-term technical trading strategy, especially popular in the 24-hour forex market.
Scalping as a Strategy
Scalpers aim to make many, quick, ‘in-and-out’ trades. The goal is to grab just a small profit from each trade and trade often. Scalpers can increase the size of their positions in order to amplify the results.
Scalpers are purely technical traders, focused only on the intraday action and unconcerned with fundamentals or long-term trends. They differ from other day traders who trade frequently but who aim to capture more of the day’s action and typically hold positions significantly longer. A scalper might hold onto a trade for mere minutes or even seconds.
Scalpers typically focus their attention on the one-minute or five-minute bar or candlestick charts, looking for technical indications that the market may surge in one direction or the other within the next few minutes of trading. They then enter the market, and once they have just a few points of profit in the trade, they quickly exit. They are unconcerned with whether or not the market will continue moving in the same direction.
For these very short term trades, indicators such as the 20 EMA or Stochastic 5,3,3 can be used. The EMA acronym means exponential moving average, which can be a good alternative to a straight SMA (Simple Moving Average).
An Example of Scalping
Here is an example of a scalping trade from the forex market: A trader sees a bullish candlestick pattern form on the five-minute chart for EUR/USD, indicating a potential market reversal. They buy the currency pair, placing a stop-loss just below the low of the candlestick. If the market advances five pips in their favor, they quickly close out the trade, satisfied with their five-pip profit. If the market turns the wrong way and goes 5 pips against them, again the trade is closed, this time for a small loss.
Another example: Since investors often take profits at a major price level such as $50 or $100 in the stock market, the first time that share price advances to such a price level, a scalper may sell short at that price, looking to just make a quick profit when the market retreats slightly.
Requirements for Success
Scalping is a potentially lucrative but very risky enterprise. Unlike traders who take positions with a favorable risk/reward ratio – where their potential profit is significantly larger than their potential loss – scalpers may enter trades where they risk more than they are aiming to make on a trade.
Some of the other risks inherent in scalping are bad trade execution, overtrading, and employing too much leverage. Talking to your FlowBank account manager can make sure the right spread and margin levels are set to match your target assets and the best tools are available for the strategy chosen.
A characteristic of scalpers is that they are quick, disciplined, and flexible. They have to patiently wait for only the most promising trading opportunities, and when they see one, they must act very quickly. A moment’s hesitation entering a market order can mean an entry or exit price that is one or two points away – and when a trader is only aiming to make a few points of profit, one or two points difference is huge. Finally, they have to adjust to even the slightest indications of changes in market momentum, so that if the market turns against their position they can immediately exit.
Scalping is a commonly used trading strategy that offers the potential to reap substantial profits each trading day. However, it is an inherently risky endeavor and can only be successfully used by the most skillful, well-trained and disciplined traders.
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