Scalping in forex, it’s a dirty job, but numerous traders choose to do it. Despite having its overwhelming share of criticism, scalping is a skill that’s hard to possess but can be rewarding.
Aside from the somewhat fast-paced action and thrill of scalping, like any trading approach, it is not child’s play. Trading is a business, and to be a scalper in forex, there is so much to consider, which this article will cover.
What is scalping?
The best definition of scalping is to observe the origins of the word itself. Interestingly, the scalping term most likely originated from the practice of ticket holders, usually in sporting and music events, to buy and then resell tickets at inflated prices for a quick profit.
Similarly, in forex, scalping is all about buying and selling for a quick profit through opening and closing multiple orders in a liquid trading session. Being a scalper involves holding positions for a few minutes or sometimes even for seconds.
They seek these opportunities repeatedly on small time-frames like the 1, 5, and 15-minute charts.
The idea behind scalping is small profits accumulate into larger ones at the end of the day or week. Typically, this approach also uses large position sizes to make profits worthwhile, although this is usually dangerous.
What is required for scalping?
Aside from a profitable strategy, there are requirements particular only to scalping.
- ‘Zero spread’ account. Accounts using floating spreads aren’t necessarily beneficial for any trading style involving high frequency like scalping and even expert advisors. Cost is one of the biggest considerations for scalpers; the tighter the spread, the better. A zero spread account is a solution to this issue.
It’s important to note scalpers should not be lured by brokers advertising ‘low spreads’ but should instead look for ones that offer this particular account allowing for more predictable costs on a trade-by-basis with lower chances of spread widening and slippage.
- Trading liquid markets during highly active trading sessions. Scalpers thrive on liquid, fast-pacing markets, most notably EUR/USD, but GBP-based pairs like GBP/USD and GBP/JPY are also favorites.
Of equal importance, a scalper chooses the busiest trading time, typically during the London, New York session or even during some news events, for more action and quick moves. Generally, those scalping will only have a handful of instruments to trade, perhaps two, three, or sometimes even one.
- Uninterrupted fast internet and excellent trading platform. Having a consistently fast internet connection and capable trading software is necessary to allow for the quickest trade execution. The best connection to a broker’s servers on the platform will drastically or totally limit any delays when placing orders.
- The right personality. Each trading style aligns with specific inherent personality traits. A scalper naturally needs to be impatient, think quickly on their feet, and deal with ‘noisy’ time-frames like the 1 minute, 5 minute, and 15 minute charts.
Pros and cons of scalping
At a glance, let’s observe the main good and bad things about scalping.
- If done skillfully and with consistency, scalping is the quickest way to grow a trading account or make a quick buck, which is the main attraction behind this approach.
Conversely, trading does not always correlate with high numerical gains when considering other technical factors that do not readily appear at face value.
- A scalper can trade fewer or even one market exclusively. This attribute is a big advantage because they do not need to scan other pairs for opportunities, saving them time and giving them focus.
Scalpers can center solely on technical analysis without worrying about fundamentals (except for news). Furthermore, scalpers can even wholly trade high-impact news releases through various strategies, events that can sometimes produce tens of pips within minutes.
- With scalping, trading opportunities are pretty frequent. Even if a scalper misses a trade set-up, it is never long before they find another. Small moves and trends occur regularly, even when markets are somewhat ‘dead’ or ranging.
- One of the biggest push factors about scalping is the immense level of concentration required. This involvement can often become stressful mentally and physically, making the trader vulnerable to costly mistakes like incorrect position sizing and ‘chasing price.’
- As a scalper, one is more exposed to market action that isn’t favorable. While there is a potential to profit from times like high-impact news events, these conditions on lower time-frames can be ‘choppy’ and too fast-paced.
It’s much harder to predict the market on an almost minute-by-minute basis. Similar to the previous point, if a scalper is not focused enough, they are likely to make risk management mistakes during volatile markets like not having enough time to add a stop loss, improperly scaling into positions, etc.
- Trading using this approach means one will often miss the ‘big moves’ in the markets because of the rapid holding time, which is a psychological battle. Unfortunately, this is the trade-off between holding onto positions and closing them quickly.
- Scalping needs lower risk-to-reward ratios like 1:1 or less. While being profitable may seem simple because of the high trade frequency, a scalper must be cognisant of this since the reward is usually tiny. Any mistake can cause a loss significant enough to wipe out several previous wins.
Additionally, with a little risk-to-reward ratio, one needs a much higher winning percentage, at least above 60%.
- Lastly, another drawback will undoubtedly be the transaction costs, which partly ties in with the earlier point. Although scalpers can choose pairs with cheaper spreads, there are times when these can widen through slippage or general high volatility.
For example, if a scalper targets at least five pips on every trade, spreads, on some occasions, can widen above this figure. Therefore, they would already be in a negative relative to what they’ve targeted.
Despite some of the negative perceptions within trading communities towards scalping, everyone is unique. Some traders’ inherent personalities will always point towards a trading style that doesn’t rely on holding positions for hours or days on end.
Many assume that scalping is dangerous and not a fruitful endeavor in the long run; however, there are no statistics that confirm this. We can see that scalping strategies are plentiful, and like any trading style, when executed with risk management in mind, they can bear profitable results.
The potential for quick profits should not sway a trader because scalping does have unique and demanding requirements that may not be everyone’s cup of tea.