Scalping explained: a beginner’s guide to scalping the currency markets
In all financial markets, the common rule of thumb is to buy low and sell high. This way you get the maximum return for your investment. However, with currency trading, you can even benefit similarly even if the prices are falling and since the forex market enjoys the most volatility and trading volume across all financial asset classes, traders can execute hundreds of favorable trades per day, especially if they are employing the use of Expert Advisors, or automated trading robots.
Scalping is just one form of a short-term forex trading strategy that is quite popular with traders that use technical analysis to predict the future market direction and plan their trades accordingly.
How scalping works
In short, a scalping strategy involves opening several positions in any currency pair or other asset class which are meant to be held for just a matter of minutes or seconds or until they turn some profit. As soon as the exchange rate moves a few pips over the spread, the trade is usually closed.
The goal of a scalping strategy is to accumulate as many profitable trades per day as possible. Even if the payoff from each trade may be quite small, when all trades are added together it can turn out to be quite substantial for a daily return.
Therefore, the best market for a scalper is a volatile one. Scalpers don’t mind if the prices are going up or down – as long as the market is moving, they can position themselves to take advantage of the movement. Steep movements are favored the most, however, scalping is also one of the riskiest strategies in the market due to how hectic price action is, in the lower timeframes.
Scalpers tend to use technical analysis to gauge the market direction and plan their entries, and since they focus on the lower timeframes where rate movements are much more pronounced, this method of trading becomes increasingly risky.
The pros and cons of scalping
One of the advantages of scalping is that it offers instant results, and most traders, and especially beginners prefer to see the results of their trading efforts as soon as possible. Also, high frequency trading on the lower time frames, while may be quite stressful, as soon as the trading session is over, there is no need to worry about the performance of a trade overnight as in other longer-term strategies.
However, in order for a scalping strategy to be successful, the trader needs to understand the assets they trade and ensure that the market is sufficiently liquid with fast execution times.
If an exit order isn’t executed on time, the resulting price might differ substantially and this may lead to a loss, especially if you consider the cost of the spread or other commissions paid to the broker for facilitating the trade.
In general, scalpers who focus on high frequency trades, need the lowest spread offering possible in order to offset the spread they pay for opening such a high amount of positions.
As such, money and risk management become a vital component in a scalper’s arsenal, and effective stop loss and profit targets need to be placed beforehand to guarantee a profitable exit.
The ideal trading conditions for scalping strategies
One of the most important factors that contribute in a successful scalping strategy is market liquidity. Trading liquid markets and popular currency pairs such as the EUR/USD or USD/CHF which are some of the most commonly traded pairs in the market affords much better pricing and nearly instantaneous execution on all orders.
When there is enough trading volume, the market becomes more competitive and the more participators there are in the market, the faster it will be for a trader to find someone to take the other side of the trade and cash out.
Therefore, traders who follow a scalping strategy should also ensure that they are trading at a time where price action is on the rise and learn at which times the each asset or currency pair is most actively traded in order to take advantage of the most favorable pricing and order execution.
Low spreads make profit targets much easier to hit and since profit targets in a scalping strategy are usually quite tight, a low spread offering increases the probabilities of attaining a favorable exit and closing a position in profit.
Is scalping the right strategy for you?
While scalpers do get to see the results of their performance as soon as they close a position, they need to make sure that they keep their profitability ratio as high as possible as each trade usually is closed as it reaches a few pips of profit.
It’s a strategy that involves a lot patience and concentration as scalpers typically aim to achieve consecutive small profits instead of one substantial trade promising high returns, but with an equally high exposure to risk.
If you think that you would benefit from trading with a scalping strategy, sign up for an account with CM Trading to enjoy the low spreads across a variety of the most popular tradable assets in the financial markets including currencies, commodities, stocks, indices and cryptocurrencies.
You can also get in touch with your personal trading specialist to discuss your profit targets and risk tolerance and get access to free coaching sessions to improve your results.
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