What is scalping?
Scalping is a fairly aggressive trading style that involves conducting many short-term deals with small profit targets. Deals on average last from a few seconds to a few minutes.
Due to the necessity of constant presence at the monitor, analyzing the market and making quick decisions scalping allows the trader to have more control over the situation than long-term strategies and bring more profit. The key of success for a scalper is the right conversion of quantitative into the qualitative side of trading.
A scalping strategy is a very dynamic type of trading. Scalping can help to accelerate the deposit in a short period of time and is, perhaps, the best method to learn trading on the stock exchange. As the well-known rule says: “To master any skill perfectly, you need to repeat the necessary action 10,000 times”. In the context of Forex it will take years for medium-term trader, while scalper could do it in a few months.
The amount of profit in scalping trading depends on many factors: the size of the initial deposit, take profit and stop loss levels, intraday goals, and the most important thing – the psychological stability of the trader.
Who is scalping suitable for?
There is a common myth that only beginners deal with scalping, but it is not true. Scalping is a daily hard work behind several monitors, it requires concentration, patience, and control of emotions, as well as the ability to orient oneself quickly in the market. In scalping, as in no other trading style, it is important to correctly determine risk levels for each deal and manage your capital. All these skills are gained by trial and error.
The most important quality for scalpers is stress-resistance because stress and constant emotional tension are an integral part of scalping trading. A stressful situation makes a person panic and starts doing illogical actions which are sure to lead to losses.
Scalper should react to any market triggers at lightning speed, without being affected by the human factor. Fear and greed are the most common emotions of traders and the worst enemy of good trading. They have no place in scalping.
Advantages and disadvantages of scalping trading
Trading on short timeframes attracts traders for several reasons:
- Fast results. Scalpers do not need to wait for a week or a month to make a profit. In just one trading day it is possible to close a great number of profitable deals.
- High profitability. Perhaps, the most important and compelling argument. Huge profit is possible due to the big leverage and making a lot of transactions with a small profit.
- Small trades – low risks. Even if some orders turn out to be unprofitable, you won’t lose all of your funds at once. You’re not limited to one transaction, the calculation of which can ultimately be wrong.
- The field for experimentation. Especially important to beginners. Beginner traders rarely use conservative trading methods with the 5-10% profit target at the end of the month.
- Possibility to earn practically on any asset. But it is better, of course, to choose something with higher liquidity.
Have you already decided to join the scalper squad? Take your time, not everything is smooth. Scalping hides a number of pitfalls, ignorance of which will inevitably lead to financial losses.
- The emotional factor. As we mentioned earlier, the most difficult thing for a scalper is to keep cool and cope with inevitable emotions. Even the most sophisticated trading strategy with perfect entry and exit points can fail under stress. Even experienced traders can lose their equilibrium by scalping, as their emotional resources are severely depleted by having to make multiple decisions in a short period of time.
- Time. Scalping requires a constant presence in the market. You don’t have an opportunity to step away from your trading terminal during the working day, as opposed to your medium-term colleagues.
- Brokerage commissions. Don’t forget that the broker will take his own percentage for each of the trades of purchase/sale, and the number of deals is huge in scalping.
- Technical service. Scalping requires additional software, which is not always free.
There are 3 basic types of scalping strategies.
Classical “glass” strategy
One of the most common scalping strategies. It is based on the disproportion between supply and demand, i.e. between purchases and sales. Their amount can never be equal, which leads to short-term movements of quotes. This is what scalpers use. Using this strategy, the scalper first of all studies the contents of the stock market index (table of quotations), i.e. the number of orders to buy and to sell. Most often, the tumbler strategy is used for trading stock futures. One of the varieties of the stock strategy is frontrunning. In this variant, the trader places his orders in front of large lots, creating some sort of safety cushion for price movements against the scalper.
Another popular strategy based on the analysis and evaluation of the world indices, the so-called “guides”. The fact is that indices are able to provoke a short-term movement of the whole market or an individual trading instrument. The use of the impulse strategy requires a comprehensive analysis of external factors from absolutely different spheres of life, from the most important political and economic events, the level of inflation, and oil prices to natural anomalies. Traders who prefer this method most often trade index futures.
This is the strategy most often used by scalpers. It is based on the evaluation of the instrument’s instant liquidity combined with observation of “guides”. Simply put, it is a combination of the previously mentioned glass and momentum strategies. This method is popular due to its versatility.
One of the peculiarities of scalping is the necessity of using additional software besides the standard trading platforms. Special programs are necessary for quick orientation in Depth of Market, getting fresh analytical information, and instant placing and closing deals because speed is the scalper’s main helper.
There are many programs for scalping, both paid and free. All of them are similar in functionality, but they may differ a lot in the interface.
If after reading the pros and cons of scalping trading, you still have a desire to try your hand as a scalper, feel free to open an account and put the knowledge you have acquired into practice.