Forex is a market where many strategies have to be applied and combined to increase winning odds. All Forex strategies include studying the market closely, and there is not one strategy that covers traders from head to toe, carrying no risk factors. Scalping is one of the most common strategies in the Forex market and it is the subject of this review.
What is Scalping?
Scalping is a trading method used by small-volume traders who edge out a profit out of the small price gaps created by the bid-ask spread. Scalpers go in and out of positions on a daily basis. They buy positions at the ask price and try to sell it at the bid price (similar to market makers), whereby they make a small profit on the spread. The currency values do not even have to move, as long as there are traders who are willing to buy at the quoted bid price. They try to skim multiple small profits in one session. The trades are usually very short and have to be executed very quickly, within minutes or seconds. Scalpers never hold their positions over night. It is similar to day trading whereby traders open and close positions within one trading session. Day traders and scalpers tend to use different charts; day traders use 5 and 30-minute charts, while scalpers stick to 1 minute and tick charts. Scalpers usually look for big news releases that cause movements in the market and try to make use of such events. For scalpers, those are the ideal conditions for making a profit.
Potential Profitability with Scalping
Scalpers or spread hunters try to get from five to ten pips per trade and repeat the same process throughout the day. Scalpers use the available leverage to hunt down profitable trades which can be repeated over the day. Just imagine that the value of 1 pip is around $10 with a standard lot. This would equal to $50 profit if five pips were earned during a trade. Observing it from this perspective, scalping can be very lucrative and brings in real money.
Small Profit Gains
The profits on positions held by scalpers are usually very small. The scalpers make up for it by trading frequently. Scalpers are not great risk takers since they prefer small but secure profits over riskier and more profitable opportunities. They follow the motto: safe, quick, and small – but frequent trades.
Trading Skills and Discipline
Scalping is not a technique suitable for all types of traders. It is designed for traders who have no problems with being stuck with their computers for a whole day/night. Scalpers are not allowed to lose focus, not even for a moment, when they are hunting spreads, especially on small moves. Scalpers do not have time to think; they have to make the right decision at the right time under huge pressure. Quick decision-making and assessing the right timing are the most important qualities of successful scalpers. For example, being able to cut positions as soon as they move against your favor requires fast decision-making. A lot of self-discipline needs to be exercised when traders want to profit from scalping.
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Market Makers vs. Scalpers
Even if it seems that they do the same thing, there is an important distinction between a market maker and a scalper. A market maker earns the spread, while the scalper pays for the spread and waits for the market to turn or move in their favor to cover the spread they have just paid for. A market maker buys at the bid and sells at the ask price, directly gaining on the pip difference. Therefore, market makers are the ones who profit from scalpers who trade as often as themselves, but they pay the spread. To summarize, market makers make a profit out of scalpers and their way of trading. What scalpers and market makers have in common is that both have to be fast and constantly in and out of positions.
As we have already established, scalping is not made for everyone. Only fast thinkers and the ready-to-respond type of traders should use scalping. The other thing is that scalpers need a platform that is suitable for the scalping technique. The platform should have ready buttons for each purchase and sale enabling quicker action and performance which is essential for this technique. Traders’ only concern should be when to hit the relevant button for entering or exiting a position. Liquid markets cause very quick executions (e.g. within seconds). Scalpers should also have very good access to the market makers who are the other counterpart to this kind of trades. Scalping is really thrilling and one of the most exciting techniques given that it takes seconds and minutes. Many traders have become addicted to the adrenalin rush and enjoy each trade as if it was their first one.
Scalping and Expert Advisors
Scalping is time-consuming, and unfortunately, can only be efficiently pursued by full time traders. But most of the traders are casual traders who use Forex as an additional income option beside their regular job. Since scalping needs almost full-time attention, automated robots have become a standard part of the Forex market. Nevertheless, traders never know exactly who is in charge of setting the parameters on automated software, and therefore, they should be very cautious. The best would be to set the parameters themselves, and most ideally, to combine manual and automated management.
Consistency in trade sizes is a rule of thumb when using the scalping technique. Random trades will result in a depleted bank account. The major idea of scalping is that profitable trades will cover for failed trades, and selecting trade sizes randomly reduces profit chances big time. Just like every other strategy, scalping also requires a plan and program. It cannot be applied out of nowhere.
This review has shown that scalping is suitable to a certain extent and that it has a potential to make profit, but like any other strategy in the vague market, it can also backfire at traders. It requires a certain set of skills, as well as a strategic and analytical approach. We have seen that it is only suitable for small volume traders who try to make small, but frequent profits until it pays off. The strategy should be used with utmost care, and all market factors should be taken into consideration, including platform features, given that scalping requires direct options with separate visible buttons.