Forex trading requires the deployment of different strategies. These strategies fall into different categories as they are used by different types of traders. These different traders have different risk tolerance among other factors that differentiate their trading styles. The categories in which traders can be categorized into are scalpers, day traders, swing traders, and position traders. Scalping is a method employed in trading used by scalpers. In this post, the properties of scalping strategies and their peculiarities will be discussed.
Scalping refers to the act of trading the market for small quick profits. It involves the use of the smallest timeframes (M1, M5) for trading. Scalping essentially involves entering a position for a very short period of time to grab small market movements at a time.
Scalping usually generates small profits per trade, and can only be made significant through the accrual of such small profits.
The following are the properties of scalping as well as the conditions that make scalping possible.
- Risk management
Scalping is usually done on smaller timeframes, this is because of two things. Firstly, scalping is usually done within minutes to hours at worst. A scalper does not look to hold their position for long. Since the validity period of a signal is dependent on the timeframe on which it was spotted, scalpers choose lower timeframes, as signals act and expire quickly.
Secondly, a scalper is looking to take advantage of small price movements. Small price movements are better spotted on the smaller timeframes, therefore, smaller timeframes are used.
Liquidity speaks of the volume of the security which is traded. Spreads on securities with higher liquidity are lower than on those with lower liquidity. As scalpers take a lot of positions daily, the amount of spread paid for each position becomes important and can significantly affect the result of trading. Therefore, scalping is done with pairs with the highest liquidity.
In forex, volatility is important for scalping. When volatility is high currency pairs move rapidly, increasing the profit potential. Scalpers perform their trade preferably during periods of high volatility, during the session overlaps.
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Scalping requires being quick and lightning execution is a very important factor in this. Because the price movements that a scalper is looking to capture is very small, coupled with high volatility, sloppy execution can mean losses.
In line with this, scalping requires fast internet connection to be able to have the most recent data and to take the appropriate decisions.
Unlike position traders who are looking to catch big moves in the market and maximize it by taking large positions, scalpers do otherwise. Scalpers seek to capture small movements in the market and also do so using relatively small positions. It is the overall turnover that makes the scalper able to make significant profit.
As a result a scalper is less exposed per trade in comparison to the position trader. Thus, better risk management.
Advantages of Scalping
The advantages of scalping are as follows:
- Multiple trading opportunities in a single trading day.
- Better risk management.
- Swap free trading since all positions are closed within a short time, so no overnight fees.
Disadvantages of Scalping
The disadvantages of scalping are as follows:
- Things can go wrong quickly in less than ideal conditions such as bad internet connection, sloppy execution, etc.
- Incurring huge trading fees – spreads, commissions.
In conclusion, scalping is a style of trading that may be more appealing to the “trigger-happy” traders than to the more conservative ones. It also should be noted that not all brokers support scalping as it is regarded as not real trading in some quarters. This is despite the fact that it is perfectly legal.
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