Scalping is like those high-action thriller movies that keep you on the edge of your seat. It’s fast-paced, exciting, and mind-rattling all at once.
Scalp trading, also known as scalping, is a popular trading strategy characterized by relatively short time periods between the opening and closing of a trade.
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These types of trades are usually only held onto for a few seconds to a few minutes at the most!
The main objective for forex scalpers is to grab very small amounts of pips as many times as they can throughout the busiest times of the day.
Its name is derived from the way its goals are achieved. A trader is literally trying to “scalp” lots of small profits from a huge number of trades throughout the day.
What makes scalping so attractive to traders?
Smaller moves happen more frequently than larger ones, even in relatively calm markets. This means that there are many small movements from which a scalper can benefit.
Scalpers can place up to a few hundred trades in a single day, seeking small profits.
All positions are closed at the end of the trading day.
Because scalpers basically have to be glued to the charts, it is best suited for those who can spend several hours of undivided attention to their trading.
It requires intense focus and quick thinking to be successful. Not everyone can handle such fast and demanding trading.
Check out this post by our regular psychologist, Dr. Pipslow, on how to work on your concentration skills.
It is not for those looking to make big wins all the time, but rather for those who like raking in small profits over the long run to make an overall profit.
The strategy behind scalping is that lots of small wins can easily morph into large gains.
These small wins are achieved by trying to profit from quick changes of the bid-ask spread.
Scalping focuses on larger position sizes for smaller profits in the shortest period of holding time: from a few seconds to minutes.
The assumption is that price will complete the first stage of a movement in a short span of time so you aim to take advantage of market volatility.
The main goal of scalping is to open a position at the ask or bid price and then quickly close the position a few points higher or lower for a profit.
A scalper wants to quickly “cross the spread“.
For example, if you go long EUR/USD, with a bid-ask spread of 2 pips, your position instantly starts with an unrealized loss of 2 pips.
Remember, when you buy, you buy at the ask price. But in order to exit, you need to sell, which is the bid price.
A scalper wants that 2-pip loss to turn into a gain as fast as possible. In order to do this, the bid price needs to rise enough so it’s higher than the ask price that the trade initially entered at.
Characteristics
You might be a forex scalper if:
- You like fast trading and excitement
- You don’t mind being focused on your charts for several hours at a time
- You are an impatient person who doesn’t like to wait for long trades
- You can think fast and change bias, or direction, quickly
- You have fast fingers (put those esports skills to work!)
- You are a surgeon!
You might NOT be a forex scalper if:
- You easily get stressed in fast-moving environments
- You can’t commit several hours of undivided attention to your charts
- You’d rather make fewer trades with higher profit gains
- You like taking your time to analyze the overall picture of the market
Some things to consider if you decide to scalp:
Trade only the most liquid pairs
Pairs such as the EUR/USD, GBP/USD, USD/CHF, and USD/JPY offer the tightest spreads because they tend to have the highest trading volume.
You want your spreads to be as tight as possible since you will be entering the market frequently.
Trade only during the busiest times of the day
The most liquid times of the day are during the session overlaps. This is from 2:00 am to 4:00 am and from 8:00 am to 12:00 noon Eastern Time (EST).
Make sure to account for the spread
Because you enter the market frequently, spreads will be a big factor in your overall profit.
As each trade carries transaction costs, scalping can result in more costs than profits.
That’s like working for an hour in a job that pays $5/hr and then going out and buying a $6 Starbucks Caramel Ribbon Crunch Frappuccino.
Be sure your targets are at least double your spread so that you can account for the times the market moves against you.
Try focusing on one pair first
Scalping is very intense and if you can put all your energy into one pair, you’ll have a better chance at being successful.
Trying to scalp multiple pairs simultaneously as a noob will almost suicidal.
If you start to get accustomed to the pace of things, then you can start by adding on another pair and see how it works for you.
Make sure you follow good money management
This goes for any type of trading, but since you are making so many trades within a day it is especially important that you are sticking to risk management practices.
Major news reports can throw you off
Because of slippage and high volatility, trading around highly anticipated news reports can be very dangerous.
It sucks when you unexpectedly see price jump in the opposite direction of your trade because of a news report!
Be prepared and know what’s coming out by checking out the BabyPips.com economic calendar.
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