Scalping, a trading strategy that consists of placing a large number of orders on a daily basis over very short periods, is particularly popular with short-term traders.
In recent years, short-term trading methods have become increasingly popular with investors. Most of them consist of opening and closing positions on the same day of trading, in the case of day trading. However, there is a short-term trading strategy that is even faster, since it consists of holding positions for only a few moments, which is known as scalping.
What is scalping ? What are the different scalping strategies ? What are the advantages and disadvantages of scalping ?
Here is a comprehensive summary of what you need to know about scalping to take advantage of very short-term price movements.
Scalping is a very short-term trading strategy. Also known as micro trading, scalping consists of "slicing" prices to trade the smallest movements in the market. Primarily aimed at day traders and swing traders, it involves moving back and forth constantly on a small number of financial products, placing buy and sell orders in minutes or even seconds. Most of the time, scalping is used on financial derivatives, such as futures and CFDs.
Forex scalping, based on the technical analysis of currency pairs in real time, is also very widespread. There is also a form of very high frequency scalping, known as HFT (High Frequency Trading). Through robots using algorithms and a very high speed connection near the stock markets, this form of scalping allows professionals to make more than 1,000 moves per second!
Scalping involves playing on very small swings, so it requires a lot of follow-through, responsiveness and a strong resistance to stress. Scalpers assume that a multitude of small wins will ultimately pay off more than a small number of larger wins.
Indeed, it is not uncommon for traders using this strategy to place more than a hundred orders per day. It is therefore necessary, beforehand, to select a broker whose spreads and commissions are as low as possible, otherwise the gains generated will be considerably reduced. One of the most commonly used forex scalping strategies is the one minute scalping, based on the basic scalping strategy of opening an order, gaining a few pips and then closing it.
This strategy is based on the fact that without high leverage, there is no risk of significant loss of capital, as the potential gains and losses on each trade are minimal. By using a well-placed and systematically tightened stop loss and take profit, the situation will not escape the trader in case of bad analysis.
Traders adopting a scalping strategy can operate in any market, as the fundamental movements do not concern them at all. Some will favor stable markets and use technical analysis. In general, these traders aim for minimal gains of 2 to 3 points maximum, or 4 to 5 pips on currencies, and are specialized on a single product whose behavior they know perfectly well. Traders who favor more busy markets will focus on constant fluctuations.
They usually aim for bigger gains and specialize in several products on which they operate simultaneously. Most of the time, in order to optimize their strategy, they reuse the setups that have worked for them before. Scalping traders usually want to have a solid overview of the market movements. To do this, they use chart analysis with time frames of 5, 15 or 30 minutes.
To maximize their gains, some traders invest with a very large starting capital and use a significant amount of leverage. However, this kind of strategy also increases the amount of potential losses. A solid knowledge of risk management is therefore necessary.
First of all, since scalping is a very short-term trading strategy, the speed of the gains is an important motivating factor. Traders are placed in a constant state of flow and are therefore more present. The systematic use of well-placed stop orders ensures that the trader minimizes risk and therefore provides greater security for their capital. Scalping, when well implemented, is a strategy that presents little financial risk.
Finally, operating on a smaller scale makes it easier for the trader to take positions. In addition, since small movements are more frequent than larger ones, traders can use scalping even in a calm market.
First of all, using the smallest fluctuations in the market logically implies smaller profits. In order to increase profits, traders must therefore place several orders per day. What’s more, a large loss can wipe out several winning trades. Scalping also implies investing a relatively large amount of capital in order to cover all these daily positions.
Finally, scalping can lead to a deterioration in the quality of life of the trader, as it requires extreme and constant concentration which can be very time consuming. It is therefore more difficult to practice in addition to a professional career.
Scalping is a very short-term trading strategy that can generate significant profits while minimizing risk. However, it requires strong analytical skills and a high degree of stress tolerance.