Scalping is a trading strategy that specializes in profiting from small price changes in the market; in most cases, a trader will exit a trade as soon as it turns profitable. Good scalpers will always have a solid exit strategy since one wrong trade could wipe out all the many small profits earned. Success with this strategy will need a direct-access-broker, a live feed and the ability to manage many trades at a go. A scalper will always strive to get as many “small-profit” deals as possible. Scalping does not focus on the size of the wins; the strategy only concentrates on the number of winning trades. Successful scalpers will maintain a high winning ratio while ensuring that the winning trades are relatively equal or bigger than the losing ones.
Attributes of a scalper
Disciplined: Successful scalpers are highly disciplined. They strictly follow their strategy without letting emotions get into their way. Their exit strategy is precise just like their entry strategies.
Quick decision makers: When scalping there is minimal time to react to market changes. It is only a matter of seconds, and you could miss an opportunity. As a trader, you must be good at making speedy decisions on whether to open or close a trade.
Is scalping for me?
If you are that kind of trader who will need a half day to decide whether to close a deal or not, then probably this is not the strategy for you. On the other hand, if you like taking quick deals, and the idea of waiting for a whole day drives you crazy, then scalping is for you. With scalping, there is very little room for error, and if an error occurs, it must be undone in the shortest time.
Common Scalping strategies
The multiple moving average approach
The use of the multiple moving average method is among the most basic scalping strategies. A series of short-term SMA is used to generate buy signals when they close above long term, and to generate sell signals when they close below the long-term SMA.
In the chart above, we begin by plotting a series of simple moving average (SMA) between 8-60 days; that is 8, 14,20,26,32,38,44,50 and 60 as highlighted in yellow. Enter a long position when all the short-term SMAs cross the long-term SMA from below as shown. Go short when the 8-day SMA crosses the 14-moving average from above. You can also utilize the short-term SMA in coming up with stop losses.
Bollinger bands and stochastic
The stochastic indicator or oscillator is an indicator based on momentum, and it works by comparing the closing price of a pair to its range of prices over a period. On the other hand, Bollinger bands are a set of two standard deviations, a positive and a negative one plotted side by side with an SMA line in between; they are used to show volatility over a period of time. These two indicators can be combined to generate short-term trading opportunities.
First, the two indicators are plotted on the chart; that is the Bollinger bands and the stochastic oscillator. Whenever there is a bullish crossover on the stochastic oscillator, and the current price touches the lower band of the Bollinger band, then a buy signal is generated. On the other hand, whenever the stochastic oscillator fires a sell signal (bearish crossover), and the current price touches the upper band, then we have a sell signal. You can make use of the Bollinger bands to plot your stop loss.
Scalping using support and resistance points
Like any other trader, one of the most significant concepts a scalper can learn is the power of support and resistance. These two levels act as a floor and a ceiling, and are useful in guiding a trader when to enter and when to exit.
This strategy will work optimally under low volatility and conditions when the market is ranging. The low volatility ensures that the risk is low while a ranging market offers numerous trading opportunities. The strategy is very straightforward; go long on support levels and short when the price hit resistance points. After a price breakout a former resistance level will often act as the next support level and vice versa (for a price breakdown the previous support level will become a resistance level on a bounce).
Scalping using the stochastic indicator
The stochastic oscillator or indicator has got two significant levels, the upper and the lower section. The lower field shows an oversold condition while the top field indicates overbought conditions. Whenever the two lines cross each other from below, you open a long position, and when the two lines cross moving downwards, go short.
The figure below indicates bearish signals in the market.
The figure below shows bullish scalping signals
The pros and cons of scalping
Low risk: The tight take profits and stop losses minimize the chance of significant losses resulting from a single trade.
Scalping is non-directional: Unlike most strategy where a market has to move in a certain direction, with this strategy you can profit both ways.
Easy to automate: As opposed other strategies, scalping strategies are easiest to automate.
Larger capital requirements: As a scalper, you will need substantial capital to make any considerable gain.
Higher commissions: Scalpers will enter very many deals in order to make a substantial gain, the more the transactions, the higher the transaction costs.
Larger leverage: To generate enough profits, one has to use higher amounts of leverage.
Scalping is one of the most widely used trading strategies by both retail and institutional investors for the right reasons. The strategy is low risk and can work in almost every market conditions. However, before adopting a scalping strategy, you need to thoroughly back-test it to ensure it is profitable. You also need to do a thorough demo, know the strengths and weaknesses of your strategy. As a trader, you should understand when your strategy works optimally and market conditions that can cause it to fail. Bottom line, whichever the trading strategy you take, remember only to invest an amount you can afford to lose comfortably. Investment in forex is highly risky, and you could potentially lose your money.
Not all the top brokers offer scalping so it’s worth checking if you are going to pursue this strategy. Alternatively, please use our compare broker tool, which allows you to add scalping as well as a number of other features to your search refinements. If you’re based in Europe, we’ve also profiled a number of major London UK Brokers.