What is Scalping in Forex?admin 4 September 2021
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Scalping is a rapid trading style. The traders who are scalping buy and sell different assets numerous times per day. Most of these positions are not held more than a few minutes, and the traders close them when they receive a little profit. It can be said that Scalping is the shortest form of day trading. Traders close all of the positions before the end of a trading day.
In this trading style, the positions are held for a short period, but the size of positions is usually large. Scalpers usually use leverages to increase the size of their positions. They try to make small profits with each trade, and by making many trades, they can make a good overall profit.
How does Scalping work?
Although it seems very lucrative, you should know that Scalping is a very risky style of trading. You may lose a lot of money in a short amount of time. However, many scalpers believe that trading based on small price movements in a short time cannot be as risky as trading based on larger price movements.
Scalpers need to have a good discipline for their trades because they make many trades, and they don’t have enough time to think about all of them properly. Based on their plans, they close the positions when they achieve the aimed profit. They never wait for a position to make a higher possible profit. Also, they close the positions when the price hits a predetermined loss level. Again, they never wait for the position to turn around and compensate for the loss.
How to analyze a market for Scalping?
Scalpers often focus on technical analysis, and the fundamental analysis does not significantly impact their trades. The investors who like long-time investments use fundamental analysis, while short-term traders and scalpers take advantage of technical analysis. They use technical analysis the evaluate the market prices and the price movements. Using different indicators and charts help them spot the best opportunities and entry or exit points.
Although scalpers mostly use technical analysis, they sometimes trade on the news or based on the events that may change the prices of an asset. Sometimes they even use the fundamental analysis, which may have a quick impact on the markets for their short-term trades. However, as we said before, their main focus is always on technical analysis.
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There are two types of scalpers in financial markets; discretionary and systematic. Discretionary scalpers trust their own skills and decide about each trade that they make by analyzing the charts and indicators. However, systematic scalpers use trading software. A trading software uses artificial intelligence to spot the right opportunities for trading. It can even make trades without the interference of a trader. The decisions that are made by software are totally unbiased. However, it is challenging for a human to take unbiased decisions all the time, and emotions always have a significant impact on the human decision-making process.
Day trading vs Scalping
Day trading and Scalping are two different strategies in the trading world, although they have similarities. The first difference is about time frames. Scalpers usually trade in very short periods, for example, a few seconds to a few minutes. Day traders use the whole working hours in a day, and their trades may take several hours. The second difference is about the size of positions, and the scalpers use relatively larger sizes compared to day traders. The scalpers take more significant risks compared to day traders based on the size of their positions. The next difference is about the skills and experience.
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Scalpers know the market very well, and they are mostly professional traders. They know what is going to happen in the market; thus, they make numerous trades without waiting for the results. Day traders are not usually as skilful and experienced as scalpers. The last main difference is about the time that both groups can see their results. Scalpers can see the results instantly, but day traders sometimes wait for a whole working day to see them.
Pros and Cons
Like any other type of trading, Scalping has its own pros and cons. Here we mention some of the important ones:
- If you do everything accurately based on good plans, it can be very lucrative.
- You can use leverages to multiply your profits.
- Market direction is not important, and you can do it regardless of the market situation.
- You can do it by using trading software.
- The cost of numerous transactions can be high.
- To make more profit, you need high leverage.
- It requires an intense focus for hours.
Scalping is very profitable for properly educated traders who have all the necessary information about trading and technical analysis. This strategy requires intense focus, quick decision making and reflexes. However, even the traders who work based on long-term periods can sometimes use Scalping to make a quick profit. The key to increasing the profits in Scalping is sticking to your plans and having a strict exit strategy. High frequency of exposure to the markets in short periods can help you take advantage of small price movements without concerning about the market situation.
What assets are good for Scalping?
The best assets for Scalping are those which are traded at high volumes and have a high liquidity rate. You cannot trade as a scalper in a market that is not highly liquid; because scalpers want to make many trades in short periods to make a profit from the small price changes of an asset in a market.
Is scalping trading good for beginners?
A fifteen minute scalping strategy is a great technique for beginners. This involves opening a position, gaining some pips, and then closing the position a little later. It is widely regarded by professional traders as one of the best trading strategies, and also one of the easiest to master.
Is scalping trading legal?
Is trading scalping illegal? Scalping is a legitimate trading strategy. Although not illegal, it may not be allowed by all brokers. This is usually a broker’s choice because it involves doing a high volume of trades in a short period of time.