Forex Scalping – the wildest animal of all!
I remember when i was starting to get involved with trading. It was quite an experience. The thrill, the adrenaline. It was all about being in a trade. It felt like if i blink the market will be gone for good. I had to be involved as frequently as possible. Of course all the dreams and hopes of making 1k into 10k for a week vanished very quickly when I lost it all for about 2 days. Don’t worry that was a small defeat compared to what was about to hit me some years later.
The point is being good in scalping is extremely tempting. In fact great percentage of the new traders start from there. Maybe this is one of the reasons why it is so hard, maybe… In this article I will discuss some of the factors that you should consider when it comes to scalping. I strongly encourage you NOT to blindly take my words for a rule or law.
When it comes to trading there is a lot of subjectivity, so i want you to think about the things i’m going to discuss and make the conclusions for yourself. We are all different, in size, shape, frontal lobe capacity etc… So saying that scalping is good or bad could be both true and false, depending on who we are talking about.
Forex Scalping 101 – Factors To Consider
1. Trade Duration
Assuming that you have figured it out, you will be cashing out very quickly. In – out, in – out. You can close 3-4-5 even more trades within an hour. Say that you are risking 1% per trade, with risk reward of 1:1, and you have won 3 out of 5 – not bad is it? This is where greed starts to grow on you, and you start running the numbers in your head. Ok 1 hour = 2%, 8 hours a day x 2% = 16% (not compounded) then we have 5 days a week, 4 weeks a month. Nevertheless duration is a factor, for some it is better as they don’t have to worry about an open trade during the night or while at lunch. Others just can’t cope with the pressure.
Consider having Scripts and Expert Advisors to help you manage and open the trades quicker with less room for mistakes. There are plenty commercial and free ones you will find on the market.
2. Risk:Reward
When you want to be quickly in and out, you have to compromise with risk:reward. This is why usually most scalpers will go with risk:reward of 1:1 or even less (even though I would strongly recommend you, to not go below 1:1 as this way it is already hard enough). It is easier to get 10 pips from the market rather than waiting for 20 pips right? However if you are not disciplined enough, you may easily allow yourself, in the fast paced moving market, to lose more than you were supposed to, leading to the worst – one loss “engulfing” 3-4 profits. This is bad, bad money management and this is usually one of the biggest reasons why scalpers fail. I repeat – “one of the”.
Since most guys are winning $1 for every $1 they risk, they must maintain a high success or win rate. Successful scalpers have a solid and proven trading strategy and rock solid discipline. There is no way around it. These are the 2 pillars that a profitable scalper career is built on.
Having to maintain such high win rate though, could be exhausting. On top of that add the fact that you MUST be on top of you game for each single trade, as every tick counts. Fast execution, fast management of the orders – this is the live of a scalper.
3. Spreads & Commissions
The nature of this type of trading requires spreads and/or commissions to be as low as possible. I hardly doubt it, that you will find a scalper out there who is trading GBPNZD or EURNOK. Exotics and even some of the crosses might have spreads that are far bigger than your whole profit of a given trade (usually around 5 pips). This may not be the fact in your case but 99% of the brokers will fall into this category.
I’m not saying that you will not have enough instruments to trade. You will probably want to focus on the majors anyway, which is more than enough for a scalper to follow. It is just something to consider and be aware of. Bottom line is – be aware, during all times, what you are going to pay to your broker, especially during volatile markets as this is when spreads are usually widened. Which brings me to the next subject…
4. News Events & Reports
Always be alerted when important news are about to be released especially for the currencies that you are trading (assuming that you are trading the forex market). As I previously said, spreads could be huge and could ruin a good trade. Best option is to wait for at least 15 to 30 minutes before and after the event. This way you can see how the market is reacting to the outcome. Most times a clear trend of where the market is going, will be visible 15-30 minutes after the news.
5. Trading Capital
Scalping requires significantly less capital to start with. Imagine that you need to wait a day or two for a trade to develop and come to your stop loss or take profit levels. How about a week or a month? Compared to scalping where you may reach your daily goal in just a few good trades over some minutes or hours. Considering that you are doing that successfully you can quickly grow a small account into a substantial capital that later on gives you the financial freedom to quit your 9-5 job for example.
Of course higher gains, bring higher risk to the table. It is not a coincidence that large players and investors are INVESTING rather than trading. There are a lot of reasons why they choose to do that but i will not dig deeper. You just have to remember that high returns = high risk.
6. Trading Time
As a scalper you will have to spend most of the time in front of the monitor. Every tick counts and you must be there to catch the price at the right level or you don’t have an edge anymore. This requires a lot of work. On the other side we have swing trading for example. A lot less time is needed to be involved. You can check the charts once a day for an hour or so, do your analysis in peace, no rush that you are going to miss the move. Set your orders and wait to get filled. Once filled again, you may need to manage or you may not need to do anything else, depending on your rules, until your Target/Stop Loss is reached. This is less stressful and less time consuming.
However many traders are “hungry” for the action and actually spending hours, hunting the best setups is how they are wired. Which one works best for you, you will have to find out for yourself.
7. Strategies that fit scalping
There are many strategies advertised especially for scalping. In my opinion breakout are some of the best for scalping for two reasons.
First of all patterns work well on any time frame you can imagine. Triangles for example are extremely easy to spot, very easy to learn and consistent (over 70% win rate). Now for a scalper that might not be enough but you can add to your edge here with better risk:reward and additional confirmations such as divergences and convergences.
Second reason is that, patterns trading will decrease the pressure dramatically. The pattern is formed out of multiple bars (at least 10) and once it starts building, you are aware of it. You know what you are waiting for, and you know where you want the price to be at a specific moment. There are rules that need to be met. As crazy as it sounds, you can even manage to place limit orders once your triangle for example, is forming its last part (point 6 of the triangle – click here for more information).
There are no “amateurs or hobbyist scalpers”. Scalping could be extremely profitable or extremely painful. Whatever you would put as an effort to become an intra-day or swing trader, multiply it by 2 and apply it to your practice if you have decided to become a scalper. I’m not saying in any way that other types of trading are easier or harder, i’m just stating the facts here for you to decide.
Last note – keep in mind that real account and demo account might differ in terms of spreads (most important) and execution time. Slippage of 2 pips could be fatal for your trade. If you have proved to yourself that you can do it on demo, move to live account but start small. Very, very small, just to try out your broker and how he handles scalpers.
Are you a scalper? Have you tried it before or you are currently doing it? I would love to hear your opinion on the subject and also what type of strategy method works for you (you don’t have to reveal your holy grail system, just give us the basics). Feel free to use the comment section below!
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Yours,
Vladimir
