What is scalping?
Forex scalping is a trading strategy in which the trader makes dozens or even hundreds of trades daily, looking to capture a few pips per trade. Generally, scalpers stay in trades for less than a minute, bolting as soon as their position captures a few pips. Simply put, scalping is a procedure by which one makes a trade with the goal of only making a couple of points. Basically scalping is profiting from rather small moves in the market. A scalper trader will only stay in the market for seconds to minutes at a time. Forex scalping is the art of using high leverage and a large number of short term trades to make a steady profit. Usually, only 1 to 10 pips are targeted for each trade. Trading is done on the major currencies. The majority of intraday scalpers tend to be futures players, meaning they profit from small moves in the market.
Scalping is based on an assumption that most Forex patterns will maintain the first stage of a movement that will move in the desired direction for a brief time, but where it goes from there is uncertain. Some of the Forex trends will cease to advance and others will continue. A scalper intends to take as many small profits as possible, not allowing them to evaporate. Such an approach is the opposite of the "let your profits run" mindset, which attempts to optimize positive trading results by increasing the size of winning trades while letting others reverse. Scalping achieves results by increasing the number of winning trades and sacrificing the size of the wins. It's not uncommon for a trader of a longer time frame to achieve positive results by winning only half or even less of his or her trades - it's just that the wins are much bigger than the losses. A successful scalper, however, will have a much higher ratio of winning trades versus losing ones while keeping profits roughly equal to or slightly higher than losses.
Practically any trading system, based on particular setups, can be used for the purposes of scalping. In this regard, scalping can be seen as a kind of method of risk management. Basically any trade can be turned into a scalp by taking a profit near the 1:1 risk/reward ratio. This means that the size of profit taken equals the size of a stop dictated by the setup.
Scalping Requirements
- Price spreads and commissions to be as low as possible in order to reduce the cost of doing business to a realistic proportion of turnover.
- Data provision and execution must be fast.
- Adequate liquidity and a sufficiently large capital base in order to make the small targets and time spent monetarily worthwhile.
The Advantages of Scalping
- Very effective method of using capital with minimal risk per trade.
- High percentage win rate.
- Scalping is suitable for the impatient trader who is prepared to devote a lot of time and continuous focus to the market.
- Event risk is small as the scalper will usually be almost certain of a fill at the chosen exit point even if conditions suddenly change.
The Disadvantages of Scalping:
- Scalping is intense, draining, and demands a lot of screen time. Accurate timing is vital.
- Higher cost per unit of profit than longer term strategies.
- Scalping requires complex knowledge of market structure and order flow.
- Scalping can be very stressful and is not suitable for spread betting.
- Scalping fee of $1 per Mini Lot (10,000 base currency) applies. Relative fee applies.
- Minimum trade fee of $1 applies.