To be successful in scalping, you need to pay attention on lot size, price movement, leverage, and some broker terms that may limit your scalping activities.
A scalping method in forex trading is so popular that many traders are involved in it. The technique is known as opening and closing one or several trades in a short time. The duration is relative and depends on the trader, and the time frame ranges from 1-minute to 1-hour.
Scalping becomes popular because it is played in a small time frame. The position is held in a short time because the observation on the market is limited. Holding positions in a short time results in a lesser risk of market fluctuation. A true scalper only cares about the spread amount and does not pay attention to the actual market condition, whether it is trending or sideways. A scalper only observes the price volatility in a certain period.
Contents
Is Scalping Method Suitable for You?
The scalping method is not used by all traders. The profit gained in every trading position is small, but you will get a quite big amount if all of the trading position profits are summed up. Scalpers always avoid taking a high risk; they never do one single entry for getting a big profit. As a result, a scalper should be persistent in observing the market price movement to get profits as much as they can.
See also: Easy Forex Scalping Strategy
A Scalper Needs Sharp Focus
Scalping strategy needs more focus and bigger attention compared to other trading strategies such as swing trading or long term position trading. A true scalper can open and close 10 positions at once, or even more than 100 positions. However, a scalper must be very careful in opening and closing the positions, and pay attention closely when deciding the stop loss and profit target.
In the beginning, the method seems so hard to apply. Yet, traders who like to gain small profits in a short span will feel more comfortable and is reluctant to move to other trading methods after experiencing a lot of practice. For a successful scalper, an ability to focus and concentrate on the trading position is absolute. It is not a born talent, but it needs a lot of practice and commitment.
See also: How to do Scalping Like a Pro
An Automated Trading System
For a full-time trader, a scalping method will seize time. The ones who trade only for getting additional income usually do not want to spend a lot of time in front of their charts. Therefore, some software companies release automated trading systems for assisting part-time traders who are eager to try the scalping strategy.
Nevertheless, you must be careful in choosing the software because not all of the features work properly. You need to know that the software is not wholly automated because sometimes you still have to decide the stop loss level and the profit target by yourself. The software function is just for helping in monitoring the positions when you can't be bothered to check them.
By learning and trying the features of automated trading software, you can save a lot of time. However, some experienced scalpers prefer not to use automated trading software. It is because they come with a complicated system and the results sometimes do not fit the target.
The Lot Size in Scalping
A scalper must be consistent in calculating the lot size. Placing different lot sizes for every open position is very risky. You might want to apply the more flexible lot size if you do not use the scalping method, or when you stop the scalping method and use other trading strategies.
The principle of trading management for scalping strategy is overcoming the loss with the profit gained. If you use the lot size randomly, sooner or later it will cause the anomaly in the profit calculation. So, a scalper must be patient, practices a lot, and concentrates fully when the trading positions are still floating.
To be successful, a scalper needs to be skillful in taking advantage of the current price movement and paying attention to the leverage risk. Although the profits collected is not that big, a scalper needs accuracy when aiming for profitability in every trade.
A successful scalper uses a combination of analysis on the price movement to make decisions. All of the basic technical analyses such as price trends, candlestick formations, and price patterns may come into play. In addition, the release of high-impact news is also important for scalpers.
Utilizing an Extreme Price Movement
Most scalpers focus on an extreme price movement taking place in the forex market. It aims at utilizing the sudden movement of price to take profit quickly. This scalping type does not pay much attention to the actual market condition, because it only capitalizes on the price volatility. The main target is to benefit from the unbalanced demand and supply of the market caused by the lack of liquidity from that may happen temporarily.
For example, market liquidity of EUR/USD in a normal situation is enough to avoid a significant gap in price movement. However, in a certain situation that may be caused by some important fundamental news, the market liquidity might decrease and create a significant gap between the bid and ask prices.
See also: Currency Pair, Liquidity, And Volatility
A scalper takes advantage of this quick and sudden fluctuation moment to gain profit. In this case, a scalper gains profit from the emotional reaction against the market condition. Therefore, the gap that happened in the moment of a fundamental news release can be used by a scalper to open a trade.
The Impact of Leverage
Scalpers often feel dissatisfied with the profit they got as they collect only small profits. They think it is not worthy of all the efforts they do. To overcome this, a scalper actually can use leverage for their advantage. The higher their leverage, the lower their margins need to be. It means they can use the bigger lot sizes to increase their profit targets.
However, many experienced scalpers recommended beginners to use small leverage in the first three months of trading until they find a suitable and tested trading method. Higher leverage means higher risk, as low margin makes your position prone to the change of price movement. In a high volatility market that most scalpers favor, trading with high leverage will bring more risks than benefits.
Technical Analysis for Scalping
A scalping method is generally applied in a 1-minute to 1-hour time frame and needs a deep understanding of technical analysis, especially when you need to apply indicators with fixed-parameter settings. Besides the technical indicators, the reading and interpreting abilities on the price movement as you can see on the following chart is very helpful and necessary. The example below is taken in a 5-minute chart.
A scalper has to be diligent, careful, and discipline in monitoring the price movement and following the method. A small carelessness may lead to a big loss. The fundamental analysis role in scalping is very small in proportion and thus is almost neglected. During news release, a scalper usually puts more focuses on technical readings or avoids trading altogether.
See also: Beware Of Misleading Myths About Forex News Trading
In a certain situation, a scalper also uses trend analysis in a bigger time frame to identify the main trend direction. However, they still use small time frames to set their trades.
Broker's Criteria for Scalping
For a scalper, a broker is a crucial variable that determines their success. They need to pay attention to the server stability, the spread that sometimes changes, or the broker's probability of cheating.
At the moment, hundreds of brokers work in the forex retail markets. The differences among the brokers are not too significant for a long-term trader. Meanwhile, for a swing trader, they may be affected a little. For a day trader and a scalper, the brokers' differences in some criteria become significant. How so?
Here are some factors that need to be noted down if you are a forex scalper.
1. Low Spread
Spread is a fee that you must pay to a broker for every position that you place. A trader who does not use a scalping method might only open and close orders in a small number for a certain period of time. They usually have a high tolerance for their brokers' spreads or other trading commissions.
The situation will be different if a scalper opens and closes up to tens of positions in a relatively short time. The spread will bring a very significant impact to their profit/loss and so it must be calculated carefully.
For instance, a scalper opens and closes 30 positions in a day. His broker charges 3 pips as the spread for every position. Meanwhile, his profit average is 5 pips, and the loss average is 3 pips. In total, he makes 20 winning trades and 10 losing trades. The total profit and loss without the spread is:
(20 x 5) - (10 x 3) = +70 pips
Here is the result if you calculate the spread fee as well:
(20 x 5) - (10 x 3 + 30 x 3) = -20 pips
The result is disappointing, right? Although you have made twenty profitable trades, the total profit/loss turns to minus once the spread is applied.
What if he trades in a broker whose spread is only 1 pip per position? With the same condition as assumed before, the calculation of the net profit/loss and spread will be:
(20 X 5) - (10 X 3 + 30 X 1) = +40 pips
That is why scalpers need to choose a broker with competitive pricing. The options are available here.
2. Trading Tools
A scalping method involves a technical analysis. A scalper is always more focused on the action and reaction pattern of the price movement from time to time. Therefore, they need a complete and qualified technical analysis feature. In this case, many brokers have provided sufficient technical analysis tools in their trading platforms.
Brokers offering the popular MetaTrader platform would usually allow the use of Expert Advisors (EA), a trading robot software that can be categorized as one of the automated trading tools.
See also: Make Money with Expert Advisors: This is How You Do It
EA is an installed program in MetaTrader that is designed by MetaQuotes Language 4 (MQL4). EA is programmed for managing the whole trading activities automatically based on the trading strategy and method. Hence, a trader should not be anxious about making mistakes in analyzing, especially if he plans to open a lot of trading positions. EA is quite popular among scalpers, particularly for those who can't manage to be full-time scalpers.
3. Beware of Scalping Restrictions
Because of its nature, many brokers set some definitions and limitations for the application of a scalping strategy. A forex broker may arrange terms such as the minimum pips for every stop loss and profit target, the minimum duration of a holding position, or other terms related to scalping. Although the majority of brokers now allow their clients to apply the scalping method freely, some of them prohibit the strategy strictly.
Furthermore, some brokers may say that they allow scalping, but then set some limitations for clients' orders that are suspected of practicing scalping. This usually ends up in brokers' intervention that results in clients' loss. In other words, some brokers may try to discourage scalping indirectly by using hidden strategies that put their clients at a disadvantage.
Based on the phenomenon above, a scalper is recommended to choose a broker that allows scalping without restrictions, or the Non-Dealing Desk (NDD) type. It is to avoid scam brokers who often intervene in their clients' orders.
See also: Safe Trading (2): How To Choose The Best Forex Broker
The NDD brokers usually channel their clients' orders directly to the market or bigger NDD brokers. In this case, clients do not trade against the broker but directly against the market. The spread in NDD brokers normally follows the real market's fluctuation, but it is generally lower than the spread in other types of brokers. Some broker variants categorized under the NDD brokers are STP (Straight Through Processing), ECN (Electronic Communication Network), and DMA (Direct Access Market).
In need of guidance of an ideal forex broker for scalping? Don't worry, we have recommended a few of them based on the criteria above. Explore the options in Best Forex Brokers for Scalping.
