What is scalping?
By Vladyslav Yudashkin Updated November 21, 2022
The volatile market throws up more and more ways and options to make money in trading, expanding opportunities for both novice investors and experienced professionals. The scalping strategy in trading is considered to be one of the most difficult ones. It implies opening a big number of deals during the day and requires full involvement into the trading session. This method is characterized by very short periods of opening and closing positions with the customary rate of return of a few pips.
It is a strategy used by many professional traders. Why? It is a complex process of intraday trading, during which a trader scalps for 5 minutes. Unlike other strategies, there is a lot more change in such a short period. A lot more trades take place in 2-3 hours than in other types of trading. This is rather fast trading so scalper has to concentrate as much as possible and be ready to react quickly to market changes. Spending many hours in front of the monitor and making hundreds of deals is exhausting and makes further work impossible, so a trader must be mentally ready for the work ahead.
Definition and Examples of Scalping
The essence of scalping is making small deals in large numbers, i.e. tens and sometimes hundreds of fast deals during the day, each of which is designed for profit of a few pips. Quantity for the sake of quality – this is the way earnings are achieved in this strategy.
Scalping implies that up to 10-20 deals may be closed in an hour, and up to 50 deals in 4 hours if the market is volatile. Trades are opened and closed, the trader works on the trend.
Some traders prefer to use a one-minute timeframe, some prefer a 5-minute timeframe, some use moving average crossing with the price, some use other indicators. All these nuances should be tested by yourself and you will come to the most suitable decision. The conditions for opening and closing positions may be different depending on the approach, but every scalper or something else is guided by the volume of orders in the market depth, volumes of deals in the strip and micro-levels on the chart.
Market Analysis for Scalping
Although scalpers make quick trades which are less influenced by economic conditions, political changes and sensational news, they accompany large players, monitor and analyse their behaviour, make advance trades or place their orders before large lots. Scalpers are a huge part of the stock market.Pipsing is the most dynamic type of trading on the stock market. By using scalping you can increase your small deposit to a medium size quite quickly, if you have a good strategy in mind. Scalping has also earned the name of the best method of stock trading education. It forces a trader to watch the market permanently, analyze it and try to understand the reasons for certain market movements. Daily checking of the latest news from reliable sources and market watching will help you anticipate changes in the chart and make better deals.
What you need to know about scalping
The main advantage of scalping is the opportunity to make profit within a short period of time. And you can trade with low volatility. Compare, for example, with long-term investors. They buy shares with future prospects and constantly wait for the next trend by holding open positions for months. Scalpers, on the other hand, make money here and now. Also, the general rule of thumb is that to master the art of stock trading you have to make 100,000 trades. And if it will take years for mid-term traders to make such deals, scalpers can do it in a few months. The important thing about scalping is that you gain more experience in a smaller amount of time, but you must carefully watch your risk-management and skillfully use the available tools. You can learn the ins and outs of scalping strategies in our private course . You should keep in mind that the skill and the ability to implement this strategy depends on your temperament, time and inclination to trade. The help of an experienced mentor at the beginning of a successful scalper will be an indispensable way to gain confidence in making right decisions and steps. Besides, scalping is more demanding for a trader emotionally than long-term trading. Not everyone can survive five stop losses in a row during one trading day – and this result is quite normal for scalping. The trader must stay calm and cool in any situation, and never deviate from the trading plan
Scalping vs. Day Trading
During scalping trades last from several minutes (sometimes even seconds) to several hours. Sometimes scalping also includes intraday trading, but more often it is called intraday-trading. In this case trades are opened in the morning and closed in the evening, which is a longer period and is not typical for scalping.
Taking into account the short-term nature of position opening in scalping, the profit is just a few pips. The trader compensates for the small profit with a big amount of opened deals. Where a short-term trader opens one position by the trend, a scalper opens several ones and manages to “catch” corrections. As a result, for one and the same time interval, the scalper has time to gain more profit.
Basics of Scalping
To predict the market entry a wide range of tools and means of technical analysis is used in scalping strategies. It takes much more trader’s time than medium-term trading or, all the more so, long-term trading. But it should be mentioned that it brings the appropriate experience.
Any section of the financial market is good for making quick trades, but because of the size of commissions and the level of liquidity, they are most often made in the derivatives and foreign exchange markets. The futures market will be suitable for trading gold, oil futures and commodity indices, as well as the volatile pairs of forex.
Derivatives such as blue chip stocks futures or indices are highly liquid, have plenty of volatility and are suitable for trading with leverage, which is very convenient for trading.
Some of these trading systems allow trading only at a certain time of the day (night scalping) or in a certain price direction (trend scalping, intraday scalping). But small movements occur more often than large ones, so scalpers does not need to sit outside the market all day long waiting for it. They can open positions at any time with acceptable asset volatility.
Scalping allows you to trade with a couple of hundred dollars and seriously expect profit that would take several thousand for a long-term investor.
You must adhere to risk management to protect your deposit. Trading in financial markets involves a high level of risk to your capital. In order to reduce the risks it is recommended to follow strict rules of money management and always set up a Stop Loss. All decisions that a trader makes while he is scalping on forex markets are his own responsibility.
Permanent control and analysis exhausts not only physically, but also mentally. In addition, as the total number of deals grows, the number of deals that are closed with a loss also increases. Since losses are an integral part of trading, many traders are prepared for them in advance. But due to low investment volume, the risk of high losses per trade also decreases. Besides, most scalper strategies require fixing losses at their lowest values.
Since scalper trading counts in seconds when opening and closing trades, stop orders cannot always be used adequately, especially if the trader trades manually. For this reason, nothing protects the scalper from the major movements of quotes against the position, the losses from which can be many times greater than the intended profit.
How Does Scalping Work?
Among traders scalping is one of the most profitable but very complex, which are very disciplined and require a lot of experience. The strategy is based on intraday trading. Anticipating small market movements, the trader opens a position with preset Stop Loss and Take Profit. When the market movement is worked out, the position is closed with small profit. As high liquid markets are constantly experiencing price movements, it is possible to enter the market multiple times during a trading session. Collecting small profit on each transaction, the trader receives the increased total return, and properly set limitation of loss does not allow the position to go in the red. The best way to conduct such trading is in volatile markets, which provide plenty of options for entry and exit.
Where have you heard about scalping?
You may learn scalping on your own or with a tutor. The first way is cheaper and the second way is more effective and quicker. Everyone chooses this way but our traders obtained their experience from scalping mentors and top scalpers of the world. We have managed to improve the generally accepted methods and adapt them to the current world situation. We will advise you useful literature, you can also watch videos on our YouTube channel . For scalpers aiming to take their trading hobby to a professional level, we offer personal scalping training with our top trader .
Is scalping trading illegal?
The stock market is strictly regulated by different bodies. The Securities Commission and the central bank supervise the legality of all trades and it is very difficult to use any fraudulent schemes under such supervision. Therefore, scalpers can be calm and confident in the legality of their trades.