Scalping

Scalping is defined as a trading approach whose goal is to profit from small price movements. Scalping implies making tens of trades during a day and could be considered as a branch of day trading.

A trader who decided to stick to scalping has to have a strict set of rules that have to be followed because a single large loss can wash away the hardly gained profits from previous trades. Thus, following risk-management, having discipline and stamina not to lose focus are required for this trading style to succeed.

How do scalpers trade?

While scalpers are searching for the right instrument for scalping, their choice usually ends up with the selection of the forex market because of its highest liquidity and volatility in comparison to other asset classes. The next suitable instruments for this trading style are stocks, mainly traded on American exchanges like NYSE and NASDAQ, being also very liquid and having a daily volume of billions of dollars.

Scalping is chosen as a suitable trading approach by many traders because it creates a lot of trading opportunities to gain profit from. Entry signals might appear several times per day and it gives certain flexibility in terms of choosing a proper and strong setup. When talking about scalping on forex markets, a common trader does not expect to gain more than 10-15 pips that may take only a couple of minutes being in a trade in case of a good entry.

This pips amount means a below-average profit amount if a safe lot size is used, that is why scalpers usually increase their volume sizes to increase the potential profits as well. That is why the majority of Forex scalpers prefer not to follow the usual 2% risk management rule.

Scalping Approaches

In practice, there are three different ways to scalp: manual, semi-automated, and fully automated. All these approaches have their pros and cons that suit the personality, character, and stamina of a particular trader.

In manual scalping, traders have to sit in front of their monitor all day long and to look after several timeframes of many instruments to notice some scalping opportunity. Such traders usually prefer to use technical analysis and patterns in their daily routine. They draw trend lines, channels, monitor price action patterns, and use other similar techniques.

The semi-automated approach implies using some additional software like indicators or scripts. This software helps traders to concentrate more on trading itself while some calculations are made by desired tools. These indicators and scripts either display some current market conditions or give trading signals, so eventually, a trader himself is responsible for placing and closing trades.

The automated approach is trading that is carried out without human involvement. All the calculations, entries, and exits are performed by the automated software. In the environment of MetaTrader terminals, such tools are called robots or Expert Advisors. They are set up in MetaTrader 4 or MetaTrader 5 terminals that have to be opened 24/7. Trading robots are either coded by the trader himself or could be made by third-party developers using freelance services.

Pros Of Scalping

The main benefit of using the scalping trading style is related to the limitation of the market risk that could be involved in trading approaches using longer-term strategies. In its sense, scalping is a truly short-term strategy and that is why the trader is facing market volatilities during a short period of time. Each scalping trade that usually does not last long limits the potential liability for the account overall.

The next feature of scalping is the ability to gain profit from slow or ranging markets. When the asset is moving sideways during days or even weeks, it means that long-term traders earn nothing (or might be even losing in case of charging swaps). While scalpers, as mentioned earlier capitalize on very short movements that happen almost every day, i.e. there is always a chance to earn.

Balance growth is one of the main features of scalping also. In comparison to investing, where the average performance per year (if S&P500 taken into consideration) is equal to 10%, qualified scalping may allow to get this performance per month or even sometimes per week. It is not a rare fact when traders turn hundreds of dollars into hundreds of thousands on forex, stocks, and other asset types, which is proven by independent monitoring services.

Cons Of Scalping

Having a strong discipline and psychology is an obligation that a scalper has to obtain in case if he wants to succeed in trading. Strict entries and exits, as well as proper money management, have to be followed without any exceptions. The break of rules may lead to unaffordable losses so scalping is an acceptable strategy only for those who understand the risks and has self-confidence in their actions.

A certain drawback of the scalping approach is the use of leverage, which has been mentioned above. Leverage could be treated as a double-edged sword. For gaining bigger profits from short-term movements larger position sizes have to be used so the potential liability is increased also.

Scalping Trading Strategies

When talking about scalping, the strategies are mostly applied to 1-Minute charts of the instruments. Though there might be some strategy examples when higher timeframes may be used to define a trend.

1. Candlestick patterns

Being a trader that has just decided to dig into this trading approach, candlestick patterns are very easy to start with. There are plenty of materials and books that allow getting an understanding of these candlestick combinations and their probability.

Below there are marked one of the most popular patterns called Engulfing. A Long Engulfing is displayed which reflects the situation when a low of the current candlestick is lower than the low of the previous candle and the close of the current candle is higher than the high of the previous candlestick. Vice versa is applicable for Short Engulfing.

Patterns are easy to spot and have a good probability, being also widely used among scalpers. Candlesticks have to be big, i.e. the engulfing has to be strong and clear.

2. News trading

It is a well-known fact that quite often prices react to some news (especially unexpected ones) and hence news trading could be used as a strategy.

At first, a proven and stable news source should be found and one of the most popular news feeds is the Calendar by ForexFactory. It has various filters like the Impact of the news (it is better to choose news with high importance), the currency that it may impact, time, the name of the event, and some more.

Among the planned news that has the highest impact on the market are Non-farm payrolls (NFP), Federal Open Market Committee (FOMC), and ECB press-conferences.

3. Trendline breakouts and pullbacks

Another one strategy that could be used not only in scalping but as well in long term strategies like day trading is pullbacks and breakouts of trendlines. They are drawn as straight lines using the highs or lows of the candlesticks as on the 1-minute USDCHF chart below.

When a trendline is being revisited by price, a trader must monitor the activity during that period. If the price starts to range near the trendline and does not move further, then there is a higher chance that it will bounce off the line so it is a good signal for entry. If the pressure is staying and the price keeps going in the same direction, then there is a higher chance of breakout so the short-term trend might be broken.

 

4. Scalping using Supertrend Indicator

When scalping, traders have to keep a high concentration on the execution of trades while some supplementary routine can be maintained by automated software. Scalpers may use tools like Supertrend indicator that will allow to get an understanding of the current trend on a certain asset or even give signals for buying and selling.

There is a real toolkit of MetaTrader indicators that might be also used in trading activity to increase the probability of entries and exits using this quality software. It may be really helpful because it gives some additional confirmation that does not require any time-sharing from a trader.

5. Order book scalping

This scalping approach is suitable for the brokers that allow getting access to Depth of Market, also called an order book. It is the list of orders that a trading venue uses to keep a track of buyers and sellers willing to execute orders with desired prices.

Mainly, order books are available on stock exchanges like NYSE and NASDAQ (or MOEX where brokers have MetaTrader 5 with DOM in the list of supported terminals) and also among forex brokers that offer cTrader terminals to the users.

Here is an example of how the Depth of Market could be used. On the chart of the asset, there is an order placed at 162.75 which volume is equal to 8417 units which is definitely bigger than orders on any other price levels. Usually, it is very hard for the price to break such price levels, therefore such order book patterns are treated as good enough to take a bounce from with a tight stop-loss.

Brokers for Scalping

Having a strategy is not the final point that allows starting trading immediately. We always keep enlarging and keep actual our brokers reviews so you can easily define the suitable company to trade with. Choosing a proper broker is also extremely important and here are the tips that should be considered during selection.

1. Regulation. Scalping is one of the most profitable trading styles so it may generate thousands of dollars in terms of income so it is highly recommended to choose a broker that will pay out the hard-earned money.
2. Tolerance to scalping. Not many brokers allow scalping strategies due to different reasons and it is definitely better to learn beforehand. Usually, brokers that allow scalping are claiming themselves as ECN/STP so that should be the choice for that tip.
3. Various trading instruments. Scalping is a type of strategy that may require testing on several instruments of various asset classes. Some traders might like to apply it to forex pairs, others may use CFD on commodities, shares, or cryptocurrencies. A broker should have all these asset classes so a trader can try them all in a single platform.
4. Low commissions. Scalping implies having tens or sometimes even hundreds of trades per day so commissions of a broker should be certainly taken into account. High commissions may turn a profitable strategy into a losing one so it is better to pay attention to the commissions and spreads section in case if reviews of brokers are used to select a proper company.
5. Variety of terminals. When executing so many trades, the trader must be comfortable with his trading routine in terms of suitable charts, execution methods, position management, etc. There are many trading terminals that allow customers to choose the handiest, feature-rich, and reliable one, therefore a broker should provide its users with a set of terminals to select from.

Scalping overview

Scalping is still one of the leading trading styles that are used by traders. The ability to earn faster than with any other approach is one of the major reasons why scalpers choose this trading method. There are many scalping strategies that could be applied so everyone will definitely find some suitable ones.

As long as the trader understands the risks clearly and accepts the obligation to strictly follow the predefined rules, then scalping can potentially provide a big value and nice results. If risks are kept under control, either manually or with the help of a risk management tool, then there is a high chance that scalping may become the main income source of a trader.

Read about other trading strategies