Choosing a Trading Style Part 2: Scalping

By
TradersDNA

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Some trading styles are fast-paced, edge-of-your-seat type affairs that require intense attention, while others are more laid-back and reflective. Scalping, a trading style that involves keeping trades open for just a few seconds to a few minutes and grabbing lots of small profits, is definitely in the former category.

To follow a scalping strategy, you need to be glued to the screen to spot opportunities and take them before they disappear. Also, it’s a strategy that requires the market to have a very high liquidity, as this tends to be conducive to the regular wave-like price fluctuations that are required for this strategy. Therefore, you need to be trading at the time when the markets are busiest, so it’s best suited to those who can afford to spend several hours a day of giving your undivided attention during peak market hours. That’s why it’s a popular strategy with day traders, rather than those that are trying to fit in trading around a host of other activities.

Also, you need to have a huge amount of concentration, and lightning-quick reactions. Both of these, of course, can be developed with a bit of work, but some will have more of a natural talent and predisposition for this than others. It isn’t a strategy for those who are looking to make big wins all the time – it’s more for those who prefer to make lots of small profits that add up to bigger ones in the long run.

Scalping could be for you if:

  • You enjoy fast trading and excitement
  • You are prepared to focus on the charts for several hours at a time
  • You have an impatient nature
  • You are quick on your feet and can change direction or bias quickly
  • You have quick reactions

It might not be for you if:

  • Fast moving environments stress you out
  • You aren’t able to commit hours on end to concentrate on the charts
  • You would prefer to make fewer trades with bigger profits
  • You like to take your time to analyse the market as a whole

If you do decide to scalp, there are a few things that you need to bear in mind. For starters, you need to trade only the most liquid pairs, such as EUR/USD, GBP/USD, USD/CHF, and USD/JPY. The main reason for this is that you need tight spreads and fast execution in order to extract profits from small movements, and you only get this with very liquid pairs.

Also, you need to trade only at the busiest times of the day. The times of day with the greatest liquidity are the session overlaps, when two major markets are open at the same time.

When scalping, you need to take the spread into account. Because you will be entering the market frequently, spreads will take a bigger chunk out of your profits overall. Therefore, you need to make sure your targets are at least double the spread in order to counteract the times when the market moves against you.

As a rule, you should concentrate on one pair, at least to begin with. Scalping is an intense trading style, so if you can put all your energies into one pair, you will stand a much greater chance of success. Once you are in the swing of things, you can try adding another pair to see if there are any benefits.

Also, you need to make sure that you follow good money management discipline. While this is true for any trading style, it is particularly important when you are scalping as you are making so many trades that poor money management will become apparent much sooner.

Another thing you need to bear in mind is that major news reports can make the markets highly volatile – exactly the opposite of the kind of predictability that makes scalping a viable strategy. Therefore, you need to learn when these major economic releases are due – such as the US Nonfarm Payroll – and avoid trading at these times.

 

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