If you’ve gotten into Forex trading, you may have encountered the term scalping. Perhaps you’ve even seen some brokers explicitly forbid using such tactics, which is sure to raise a few eyebrows. After all, if brokers are trying to stop traders from doing something, that means the strategy must be super effective, right? We might have to disappoint you since scalping, like any other trading method, has both its advantages and disadvantages.
While that might have dissuaded those looking for a magical always-win strategy from reading further, it would still do you well to learn about scalping. After all, if you’re still wrapping your head around trading, you should try as many strategies as you can. That will not only make your trading fundamentals more reliable but help you in developing your personal trading style. Experimentation is vital in the initial stages of trading, as it’s the only way to recognize your strengths and weaknesses.
But what is even scalping? It’s a fast-paced, reactive strategy that has traders making many small trades for incremental gains. It relies on getting a few pips worth of profit on each transaction while only holding positions for short periods. It works around the principles of smaller changes being more common and having smaller exposure, thus reducing risk.
So while a regular trader might hold a position for days or weeks, a scalper only maintains it for mere minutes. That results in scalpers sometimes making hundreds of trades per hour.
What do Scalpers Need?
Each trading strategy requires specific things from the brokerage rather than the trader. Scalping is no different, requiring that a broker has individual specifications while not having others. Because of the speed that scalpers require, for example, a brokerage needs to have quick execution times. Since scalping aims for even the tiniest motions for profit, your trades need to execute at near-instant speeds.
Likewise, since you’re relying on many small trades with incremental gains, you must avoid fees. Many brokerages integrate additional costs into their service as quick revenue-generators. For scalpers, that can spell disaster as their wins often get nullified by any further payment.
Lastly, scalpers usually go for low-spread assets as those increase accuracy. Technical requirements aren’t the only thing necessary for successful scalping, as traders also need to take some personal responsibility. Those that wish to become scalpers need to have quick reaction times, as the tactic requires immediate reactions for it to work. Even the smallest delay can turn a winning trade into a losing one, and you need to minimize the chances of that happening. Additionally, scalping requires at least a decent multi-tasking level, as you’ll be making many trades in short intervals.
When & How to Scalp
The great thing about scalping is that it can be used in any market, as long as spreads are tight. However, some situations are more beneficial than others. Assets with high liquidity and volatility, for example, are quite sought after by scalpers. That’s why many employ scalping strategies with Forex, as it’s known to be the asset class that best fits the description above.
But perhaps you’re looking for more specific guidance on what to do. There’s extensive literature on scalping that you can familiarize yourself with, and you should do so to find your own style. However, we’ll provide a few simple strategies traders can use to try their hand and see whether they enjoy scalping tactics.
Price and Volume Action
The strategy works around a fundamental principle in that volume changes often signify that prices will change as well. Namely, low volume usually indicates a momentary price trend reversal. Adversely, high trading volume means that the trend is relatively stable. Scalpers use that information to make their predictions and finalize their trades in the short volume-trend windows.
Naturally, the method requires immensely precise volume indicator tools, and it’s useful to have multiple open so you can cross-compare.
EMA Scalping Scalpers often use exponential moving indicators (EMAs) to aid them in their trades. Many think that those indicators are a great indicator of what you can expect the price to be. As with the previous tactic, precise tools are necessary, and using more than one is advised. The strategy itself is quite simple and only requires differentiating between bullish and bearish markets. In the former, you should buy when the price reaches the highest EMA, while in the latter, you should sell when the price and the lowest EMA meet.