Today we will be talking about scalping as a trading approach. Scalping is characterized by very short-term trades with minor price changes and a profit of several ticks. Typically, a trader opens a trade and holds the position from a few seconds to several minutes. Trading is carried out on minute timeframes.
The scalping strategy is usually applied in volatile markets where the spread between the bid and ask is very small. Sluggish and slow instruments are not suitable for a scalper. As a rule, scalpers prefer to trade gold and oil, stock indices, as well as major currency pairs.
Like any trading strategy, scalping has strict rules for opening and closing a trade. But in this case, you have to observe them even more meticulously than in day trading. Any mistake will cancel out all the previous small earnings.
Let’s hear some pros and cons of scalping.
- a large number of trades, even when the market is flat;
- consistent and positive equity curve.
- commission fees;
- the need to constantly monitor the screen and trading;
- emotionally stressful and tiring.
- The first scalping method is rather advanced and potential profit is quite small. The scalper opens opposite positions in the same instrument. This method is suitable for low volatility markets.
- More traditional scalping strategies are well suited for rapidly moving, volatile markets.
- The second scalping strategy is based on using a large number of assets and taking advantage of very small price movements. A scalper can simultaneously trade a dozen currencies, profiting from slight price fluctuations.
- The third scalping strategy is geared towards buying assets based on signals from the trading system. The trade is closed once the instrument reaches a 1:1 risk to reward ratio.
Moving from theory to practice. Let’s take a look at the scalping strategy based on news trading.
You don’t need to use any technical indicators with this strategy. All you need is the Economic calendar and a small cushion of time before the news release. A trader enters the market through pending orders. A couple of minutes before the publication, he sets pending orders above and below the price. Stop-loss is usually set 5-10 pips away from the price, Take-Profit should be two times further. After the news is published, the price should hit one of the trades. The trade is then closed at profit, the second order is canceled. If both trades are activated, and one of them closes in the red, profit received in the second trade offsets the losses.
We recommend trading only on significant, high-impact news such as inflation and labor market reports. The main disadvantage of this method is that sometimes both trades are closed at a loss.
Scalping is a high-risk strategy and it’s not suitable for everyone. First of all, a trader should have a good risk tolerance and has to be able to work under pressure. Scalping can be very stressful. You need to trade with the minimum lot size, and your deposit should be at least $500.
The method is definitely not for beginners, it requires months of practice on a demo-account and won’t be suitable for those making their first steps in the financial markets.