Scalping is a style of foreign currency exchange trading that has been around for many years. Essentially, it is the act of implementing currency trades in the foreign exchange market using an extremely speedy entry-and-exit approach.
Scalping is defined by its:
- Shorter time frames
- Faster execution of trades
- Larger quantity of trades
- Tighter stop loss limits
- Consistent trade sizes
- Higher leverage
Time frames
The swift movements of scalping are meant to generate small profits on shorter time frames with every trade. Such quick intra-day trading can be very appealing when compared to waiting to profit from transactions that can take days, weeks or months.
Trades are placed on short time frames such as one to five minute charts with quick transactions that usually target less than 10 pips per trade. A scalper’s trades typically only last seconds to minutes. Scalpers tend to use charts on shorter time frames in order to quickly recognize entry-and-exit opportunities.
Such fast execution of trades makes for a much larger quantity of trades placed in a single day—sometimes up to hundreds.
Stops
Scalpers typically use tight stop limits on their positions. The reason for this is simply to minimize loss when trades go wrong.
Sizes
Consistency is key when it comes to the size of a scalper’s trades. Scalping is based on the principle that profits should cover any losses. Guaranteed, there will be wins. And, guaranteed, there will be losses. When a scalper places small trades here and large trades there, they are increasing their chances of the larger trade ending up the loss. So, by keeping all trades about the same size, no loss is bigger than another.
Leverage
In trading, higher leverage typically involves a higher level of risk. However, many traders looking to minimize risk typically lean towards the scalping style of trading due to the shorter time frames and faster execution. High leverage (100:1 to 400:1) is the crux of scalping, because the shorter the periods that a scalper is in a trade means that the amount of risk is decreased. Therefore, there is a certain amount of “risk control” in scalping that is not found in regular day trading.
However, education is imperative when using such high leverage. An educated and disciplined scalper could easily multiply their investment account and yet only spend a fraction of the time in the market. Remember, leverage can not only magnify one’s profits, but losses as well.
Personality
Considering all that is involved in the scalping style of trading, there is one thing that is most often overlooked—the personality of the trader. It is extremely important that one take into consideration the trader themselves. Does one have the abilities (mental and physical) to endure this style of trading? Scalping the market is an intense style of trading and is not right for everyone. It requires a great deal of commitment and can be very time consuming. An impulsive or impatient personality is not suited to such a style of trading.
Strategy
A strategy is defined as a plan, method, or series of maneuvers for obtaining a specific goal or result. To say that strategies are important would be an understatement. Would you, for example, charge blindly into a battle? Let’s hope not.
Defining and following a scalping strategy—with patience—is vital to a scalper’s victory.
Systems
Advancements in technology have provided traders with the ability to automate their trading using specialized trading system software. Using these systems can ensure the speed and accuracy required for successful scalping. Executing one’s scalping strategy manually and remaining effective can prove difficult given all that’s involved in the scalping style of trading—particularly when it comes to fundamental news and announcements. Scalpers are not necessarily concerned with trends, only the immediate responses. Therefore, this use of automated systems can be particularly helpful to scalpers.
Education
Google scalping and you will most likely read that “scalping is a good way to make money in the forex market.” And yes, it can be true so long as you know what you’re doing. Many perceive scalping as a safe style of trading due to its quick nature. Get in the trade and get out—fast! However, as in any form of trading, there can be high risk in scalping. One loss could easily wipe out the many small profits that a scalper collects. So, this begs the question, would you practice medicine without an education? Or, try to pilot a plane without the necessary skills (outside of Hollywood, of course)? Probably not. So, why then do people think they can jump into the foreign currency market without knowing what they’re doing—and be successful to boot?
The foreign currency market is the most liquid and fluid market in the world, but don’t let this favorable fact fool you. It can be dangerous. Especially for those who are new to it. Scalping can be challenging, and without education, costly.
Getting the knowledge of how and when to trade can not only remove the complication of scalping, but can improve the accuracy of such a fast style of trading.
For More Information
Check out MTI’s Ballistic Scalping Course >>
Meet Our Expert Analysts specializing in scalping:
Gary Fichardt, FXBigDog >>
Jose Tormos, FXMVP >>
Tad DeVan, FXTechno >>
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