Scalping – is it for you
The more you trade in forex, do you know what kind of trader you are? There are mainly 4 types of traders – scalper, day trader, swing trader, and position trader. Here, we will explore a greatly popular style called scalping.
What is it?
Scalping is a technique that requires the trader to enter and exit the positions very quickly, generally within 3-5 minutes and as quickly as 1 minute.
Scalping has gained in popularity because this style is being seen as a safer way to trade forex. Because the positions are only open for a very short period of time, the exposure to market movements is much less than the conventional trading methods.
How does it work?
This technique works by riding on the short periods of volatility. Since the market risk is low, it also means the returns are low too. Scalpers trade very frequently to make up for the small returns per trade. They trade potential high returns from long trend runs for smaller but more frequent gains. For example, if a scalper buys 100,000 units of GBP/USD which gains 3 pips before the position is quickly closed, the gain is only $30.
With the minuscule gains from a single trade, no wonder scalpers trade very frequently to make decent returns. This is aided in part to leverage, so that the gains can be multiplied.
What are some strategies?
1) Significant news release
This take advantage of the emotional reactions of the participants upon hearing the news. The rattled temperaments cause large swings and fluctuations which can be exploited by scalpers. The timing of entry is important. You do not want to enter at the time when reactions are most emotional and when information is still being released and changing. What scalpers do during this period of time is to observe and determine the direction of the market
You could enter the market after 10-15 minutes of the initial new release, but because the environment is very volatile, it would be prudent to protect your downside with a tight stop-loss yet maintain at least a 2:1 risk-reward ratio
2) Breakouts
Without news releases, prices can also breakout of established resistance and support levels. It is at the initial point of breakout where scalpers will enter the market. Here, the price direction is unambiguous, moving upwards if it broke the resistance level, or downwards if it breached the support level.
3) Support and Resistance Levels
The testing of the support and resistance levels provide an opportunity for scalpers. The stronger the levels, the more likely we are able to determine correctly the direction of the trend. When the prices approach either levels, scalpers could prepare to trade in the reverse direction.
Are you suitable to be a scalper?
Are you easily ruffled? Are you impatient? Are you easily distracted? If you are any one of the above, scalping is probably not suitable for you.
The art of scalping requires the trader to be able to focus intensely during the span of trading which may be a few hours at one go. During this period, he may have opened and closed hundreds of trades, and analyzed much more. Every minutes counts, so he has to be quick enough to enter at the right moment, yet maintain a cool head to properly assess the conditions. Yet, not every day presents opportunities. The trader has to be patient enough to wait for the correct condition.
As always, practice a demo account to be sure this is something suitable for you.
Finally,
While scalping strategies are technically not too different from other conventional trading methods, the mental and emotional capacity for succeeding in scalping cannot be under-estimated. The intense pressure on the trader can wreck havoc for the portfolio if he is not able to deal with it with discipline, patience and composure.