Scalping is another way of trading that focuses on earning on small price fluctuations. This is usually done right after a trade has been entered and has begun to post profits.
Scalping imposes certain requirements from the trader – including having a firm exit strategy because an unmanaged loss could just burn through the small series of profits made through this method. Other requirements include using the right analysis tools, which includes a live feed, direct access to a broker (if you’re not going to trade by yourself), and the patience and stamina to wait and then make many trades.
In scalping, which is also known as quick trading, trades would usually last for just a few seconds to a minute. If a trade takes longer than a minute, it ceases to be classified as scalping – it becomes a regular trade.
The purpose of scalping
Scalping is done a way to make a small series of profits but without exposing the trading account to a lot of risk. Scalping is a low risk strategy because of the quick open and close trading method used. Scalping is only a viable and profitable method because of the leveraging that happens in forex trading. Because of leveraging, a trader can have access to a larger virtual fund that he can use. The larger fund enables him to profit from just two to three pip moves.
Scalping is also done because smaller moves are easier to get. For price changes to make big movements, a bigger imbalance needs to happen – this could be in terms of economic indicators or technical reasons. But with scalping, you can profit without having to wait for these big movements. It is more feasible to earn a few dollars from small movements than to earn big time from huge movements because small movements happen more often than big ones. Even when the market is quiet, a scalper can find opportunities to profit.
How is scalping done?
Scalping and profiting from scalping mainly involves the concept of scale. Take for example, going into a long position using 100,000 units in the GBP/Yen currency pair. Each pip that moves favorably to your position earns you $10. Close your position after three pips and you gain $30 in profit. Not too shabby for a trade that lasts for less than a minute.
Two Types of Trading
There are two types of trading styles that you can use for scalping, the primary style and the supplementary style:
The serious scalper will initiate between five to hundreds of trades in one day and will often use the extremely short one-minute chart because the time frame is short enough – which is good for him because he can see the setups as it forms as closely to real time as possible. Automatic and instant initiation of orders is also important because the scalper’s strategy is time sensitive. Because of the time factor a direct-access broker is often needed for this type of style.
Traders of different persuasions can use scalping as a complimentary or backup approach to their preferred trading style. Traders can use scalping as a trading strategy if the market is locked and there is only a narrow range of movement. It can also be used if the market is choppy. Scalping is a good trading strategy if no trends can be seen from a long time frame. When this happens a short time frame may bring out trends that a trader can take advantage of, and these trends are good opportunities to scalp given the short time frame of the chart.
Another supplementary way of using scalping is through what is called the “umbrella”. In this approach, a trader will enter into a position that he intends to keep for a long time-frame. But while the main trade is happening, the trader can point out new setups that are within the shorter time frame but still within the direction of his main trade. He then enters and exits trades as he sees fit.
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