Let us begin by understanding what scalping trading is. Scalping trading is a style specializing in profiting from small price changes and making a fast profit by reselling.
Scalping in Forex is a trading method based on performing many open operations for a short time. For example, in a scalping strategy, positions are kept open for a maximum of 3 to 5 minutes, the usual duration of operations being only 1 minute.
The popularity of scalping is because it is perceived as a strategy that offers security to the trader. This is mainly due to the following:
- Positions are exposed to the market for a brief period compared to other strategies that work with more extended periods, such as swing-trading or even day-trading; therefore, the risk of losses due to strong market movements is lower.
- Since a scalping strategy requires little time, the operator’s variables to take into account are fewer. In a scalping strategy, the spread or the use of one or two indicators is often more critical. Therefore it is not necessary to pay as much attention to the analysis of trends or the range of oscillation of the prices of the currency pair operating.
In summary, the general characteristics of a scalping strategy are:
- Multiple operations with a short exposure to the market.
- Trading individually has a small profit, usually between 5 and 10 pips.
- The strategy’s profitability is given by the sum of the benefits of all the operations carried out.
- It is common to use
- to increase the profit of each process.
- A scalping strategy is usually developed when the market is at an ideal time for its development. Thus, the hours are chosen in which it has, for example, the greatest liquidity.
After knowing about Scalping Trading, you must be wondering what strategy goes into the mind of traders who aim to make many short-term profits throughout the day. And if you’re wondering how to go about scalping, we’ve covered some of the profitable scalping strategies in trading to help you determine which scalping trading strategy could work wonders for you.
1. Relative Strength Index (RSI) Strategy
Some of the strategies use momentum within the market to identify the best entry and exit points. Still, the relative strength index (RSI) depicts the future aspects of the asset over some time. As a result, the RSI can determine the overextended prices, which can help traders find entry points with the prevailing trend.
2. Volume & Price Action Strategy
This strategy follows the theory that changes in volume are often followed by price action. So, for example, when the volume is low, it may indicate a trend dying, reversing, or stalling before picking up again, suggesting that you will have to be patient when the market is sitting within a range. And when the reverse takes place, i.e., the volume spikes alongside price action, then aim to buy before prices go up and sell once the prices are high.
Remember that this scalping trading strategy can be insightful, but it might not always be accurate. Some traders will be tempted to rely on the volume without full confirmation of the bullish trend. So, it is necessary first to check and then move on to take the required actions.
3. The moving average (MA) Strategy
This is a simple technical analysis strategy that smooths out price data by creating a constantly updating average price. The average is taken out over a specific period, be it twenty minutes or thirty weeks or any period the trader chooses. This strategy is used primarily as a trend indicator and also identifies support and resistance levels.
4. Zigzag Strategy
Zigzag scalping trading strategy helps to discard market noise and smooth out price fluctuations to reveal underlying highs and lows. This strategy works best in trending markets, making it a good choice for popular currency pairs. The aim here is to plot the points when the price reverses by a percentage more significant than the specified level.
5. Parabolic SAR Strategy
Parabolic SAR strategy indicates the direction in which the market is moving and provides entry and exit points. SAR is the abbreviation of stop and reversal, which symbolizes a series of dots placed against the price bars giving an edge to the trader by indicating the direction the underlying is moving.
When to use the Scalping Strategy?
As stated, a scalping strategy is based on performing numerous short-duration trades during specific times in the market. According to these premises, an operator who wants to develop this type of trading must have the following qualities:
- Availability of time to be fully aware of the market during the duration of the operations
- Constancy to carry out a high number of operations.
- Discipline to close operations in a concise space of time.
- Be willing to give up more significant profit opportunities for the security of smaller but more frequent profits.
- Ability to cope with losses.
Traders who use scalping strategies are characterized by being patient and disciplined. A trader with a more expressive style or who seeks to obtain large profits in a short time and with few operations should not use this type of strategy.
As explained, a scalping operator has to be very methodical about his trading decisions and about market expectations at all times. Due to the high number of trades, it is common for some trades to have losses, but the trader must bear in mind that the final profit of the strategy will be the result of the final sum of all trades. Therefore, even though scalping techniques are based on short-term operations, that does not mean that profits or losses are immediate.
Scalping requires a trader’s full attention as possible entry points can appear and disappear very quickly, and thus, a trader must remain focused. Therefore, scalping Trading is not suggested for individuals with day jobs and other activities as any distraction may have an adverse result as scalping is a complex strategy to execute successfully.
Scalping Trading requires quick responses to market movements and an ability to make decisions on the go. Trading is an activity that rewards the ones with utmost patience and discipline, and those successful in scalping do demonstrate these qualities.
About the Author: Shristi Biswas is a final year student at Manipal Institute of Communication.