This week I received very similar questions in a span of two days. “What is scalping in trading,” “what is scalping trade,” “what is scalping in forex,” and “is scalping trading profitable?”
One that even intrigued me the most was “is scalping illegal?” I had not expected such.
All these questions revolve around scalping hence can be addressed in a single post.
Scalping is a really short-term trading strategy, and even with its odd name, it’s really common with experienced traders.
Scalping is more of a trading strategy where traders look to profit from small price movements in the market.
Scalping showcases the shortest period or trend of trading, this is even shorter than day trading and acquired its name due to its efforts to skim numerous small profits from a large number of trades in the course of a trading day.
Scalpers hold the belief that to catch and benefit from simple small market movements is easier compared to timing large price moves.
Scalping can be equated to those high action thriller movies that keep you glued to your screen.
It is fast-paced, interesting, and mind-rattling altogether. Such trades are normally executed in the minutes’ time frames.
Scalpers in forex are mainly interested in grabbing small quantities of pips as much as they can in the busiest times of the day.
Given that scalpers have to be glued to their screens for the better part of the day, this trading strategy works well for those traders that have time to do so.
It demands concentration and quick thinking to succeed.
Forex scalping is also nerve-wracking, and it is quite easy to elevate your stress levels hence play with your emotions.
Remember that you need to keep your emotions in check if you are involved in forex trading.
This is why I always say, DO NOT go for a trading strategy since people are saying that it is “profitable.” There is no ‘holy grail’ trading strategy in this industry.
What you need is to create an edge around your trading strategy. This comes about as a culmination of doing several things right over an extended period.
Always choose a trading strategy based on your personality. Go with what you feel you are comfortable with.
Now that you are aware of what is scalping in trading, I can touch on some attributes associated with scalping and scalpers to help you decide if this form of trading suits you.
Why are Traders Involved in Scalp Trading?
Scalpers trade mostly in the short term because they believe it could be easier to generate profit based on short market movements as compared to long market movements.
According to most of them, long-term market movements may not develop for days, and may also encounter major corrective movements.
Another important factor in scalping is being certain that your broker gives you swift execution even in unstable market movements.
Additionally, it’s crucial to note that scalping is hardly a trading strategy used by beginner forex traders.
It needs a great deal of knowledge and discipline, and it is normally quite impractical for people who work in 9 to 5 jobs.
The viability of scalping for trade relies on various contributing factors and inputs.
Efficient market entry and exit
There is a need for sufficient computer hardware and software technology to reduce latency-related slippage and relate within the marketplace properly.
Slippage on entry and exit can be important in the general profitability of a scalping approach and is enlarged when the profit per trade is small.
High market liquidity
So as to enter and exit the market fast and efficiently, there needs to be a number of possible buyers and sellers available at the trader’s desired price.
Markets that show a lot of liquidity, other than tight bid/ask spreads, are the main candidates for scalping.
High spreads can be disastrous for a scalper due to tight stops being used.
Low transaction costs
There is a need to reduce commissions and fees so as to accommodate a high-volume tactic to trading in a specific financial market.
High volume trade identification
Repeating small profits over and over is one major part of the scalping trading strategy.
It is important that the adopted trade recognition philosophy be capable of producing a high volume of possible trades.
There are some popular ways of scalping in forex and other markets where short-term traders attempt to have some market share.
Coming up with trading strategies for the purpose of capturing the bid/ask spread is common in forex scalping.
Increased leverage with the aim of harvesting small moves in price, on the other hand, is commonplace in the equities and futures markets.
You have information now on what is scalping in trading and why traders indulge in scalp trading. Would these reasons drive you into scalping?
Benefits of Scalping in Forex and other Markets
Since scalping is implemented within short periods of time, exposure is minimal, and thus the risk of experiencing an adverse event is lower.
Scalpers don’t leave trades open overnight.
In the event of a losing trade, the amount of loss involved is also minimal if a trader does not trade with a high lot size.
Scalping is a plan that can simply be understood by both experienced and beginner forex traders (though I am 50/50 with including newbie traders in this statement).
Provided the trader is disciplined and active with implementing trades, scalping needs less knowledge of the general market.
However, there are several dynamics associated with forex scalping like putting emotions in check, and that is why I would not encourage newbie traders to take this route.
Learning how to control your emotions in forex trading comes with time, as you have already encountered various aspects relating to the market.
Scalpers can leverage trades and start larger positions using their margin/deposit so as to have a higher profit.
However, you should always be careful when using leverage as a trader. You should not use it altogether because it is available, yet you do not know how it can negatively affect your trading prospects.
This applies more to beginners in forex trading.
Frequency of trades
Smaller moves are easier to acquire and more common than larger moves, even in periods when the market is quiet.
Risks Associated with Scalping in Trading
As many trades are executed daily, commissions and/or fees are also high compared to what day traders and swing traders would incur.
Trades are executed in minutes, if not seconds, of each other.
With this, scalping needs a lot of concentration to enter and exit a trade.
A slight lapse or interruption in concentration could easily lead to a significant loss.
Most scalpers choose this trading strategy since they believe it increases their chances of becoming profitable traders.
The short-term positions do not guarantee profits. A CFD (contract for difference) or currency pair can change fast towards the opposite direction.
I hope you are continuing to gain knowledge of what is scalping in trading. The more information you gain, the easier it will be for you to make a decision on whether you can be a forex scalper or not.
How to Know if You are a Forex Scalper
- You are okay staying focused on your charts for hours at a time
- You have fast fingers
- You prefer fast trading and excitement
- You are a fast thinker and can change bias, or direction quickly
- You are impatient and doesn’t like to wait for long trades
- You always work with the desired speed and efficiency like a surgeon
How to Know that you are not Meant to be a Forex Scalper
- You can’t spare several hours strictly checking the charts
- You are slow in analyzing the general market
- You quickly get stressed in fast-moving scopes
- You prefer making fewer trades with more profit
Things you Ought to Know before Being Involved in Scalping Trade
Scalping is not only time demanding but also needs a trader to have a lot of discipline.
The higher time frames and smaller sizes make it easier for traders to take a break from their trading platforms, as possible entries are fewer and can be observed from a distance.
This is not the case for a forex scalper as it calls for a trader’s full attention.
Possible entry points could appear and disappear very fast, and therefore, a trader must remain tied to his/her charts all the time.
For those busy during the day, scalping may not be the best strategy compared to longer-term trades with bigger profit targets. A good example is swing trading.
Success with scalping trade is not easy to achieve. One reason is that it demands many trades within a short period.
Research shows that traders who trade frequently lose money quickly and have a negative equity curve compared to traders dealing with higher timeframes.
On the other hand, many traders would achieve success and minimize their time commitments, and reduce trading stress by looking for long-term trades at the expense of scalping strategies.
Quick responses to market movements in Scalping is inevitable, as well as an ability to forgo a trade if the specific moment is missed.
‘Chasing’ the market and no stop-loss discipline are the main reasons for scalpers failing to succeed.
The thought of being in the market for a short time is motivating, but the possibility of being stopped out on a sudden move that quickly turns is quite high.
Scalping trade tends to reward patience and discipline.
Those who succeed in scalping hold to these qualities, and the number is quite small.
Many traders achieve better in longer-term trading strategies, smaller position sizes, and a less frenetic pace of activity in the market.
Conclusion on what is Scalping in Trading
I know by now your question of what does Scalping mean in trading has been answered.
In the current trading markets, scalping is still among the most common trading methods being utilized.
Independent retail traders, as well as institutional investors, use some scalping strategies for sustained, long-term gains.
Provided the risks are defined well and accepted, and the proper inputs are properly positioned, scalping can offer value and opportunity to almost every trading process.
Usually, risk is inherent to investment; thus, forex traders can gain by playing their part and/or seeking guidance from independent financial advisers prior to the trade and other plans.
However, it is good to know that not many forex scalpers succeed in their endeavors.
It takes time to master some concepts and learn how to trade effectively.
Forex scalping does not give beginner forex traders this opportunity because one is always a nervous wreck and wants to be involved in every action taking place in the market.
There is always no time to do post-analysis for your trades so that you can see where you are going wrong.
As a result, it becomes quite difficult to develop an edge in the market.
What I would advise is that only indulge in scalping trade if you feel it suits your personality, and you are comfortable with it.
Do not get involved since you heard some traders talk about how it is profitable.
I think this information on what is scalping in trading will help you to decide on whether you are suitable to being a scalper or not.