ScalpingIs It In Your Interest To Trading With Scalping?
Within the scope of Online Trading, scalping is defined as the opening and closing of positions on various financial products in a very short time span of few minutes, orseconds in extreme cases. Scalping should not be confused with day trading that deals with a daily time horizon.
A trader's first call of action when scalping is primarily to choose very liquid and fast marketsto carry out trade operations, and also to settle for a few pips per transaction with equally minimal risks.
Scalping is one of the most commonly used methods of trading but is also the most difficult, especially because it requires a high dose of self-control and discipline, and inevitably entails much effort and stress.
Spread and commissions for scalping
Scalping is a highly speculative activity, and whoever does it often open and closes a lot of trades every day with the aim of achieving small profits. A scalping approach usually targets very tight profit and stop loss, about 3 or 4 pips from the entry price. However such gains must be able to cover the costs of the transaction itself, market maker commissions and Forex spreads. Theseare the main obstacles to overcome in this business.
Forex spreads can usually vary between 1 and 4 pips depending on the currency pair and the broker.Anyone who wants to embark on the Forex scalping route must necessarily find a convenient online broker for this type of fast trading.
Scalpers usually tend to choose ECN brokers who have very tight spreads and low fixed fees usually a few dollars.
This fixed cost of operation tends to increase the trader's stake thereby encouraging a scalper to take on more leverage to reduce the effect of commissions.
Among the most used scalping techniques by professional traders, is a method whereby a trader enters positions based on counter-trend strategy at past supports or resistancestaking advantage of short term moves. So once the support/resistance lines are established, the trader enters a buy order as price touches the support level yieldingsome PIPs in countertrend. Vice versa, sell orders will be placed at resistance price levels.
Using the same logic of supports/resistance, many scalpers use dynamic trend lines,established by connecting a lower low to a higher low for an uptrend line, or higher high to a lower highfor a downward trend as described in the chart below. An example of a dynamic trend line is the Tom Demark’ trend line indicator.
Another common method of countertrend scalping is to use Bollinger bands (usually set to 20 Period). Opening of trades occurs when price touches or close above the upper or lower bands, without the bands having a high slope. This means that if the price touches and goes beyond the lower band and not in a high downward slope, then we enter a buy order to gain from the increase in price. Similarly, if the price touches and goes beyond the upper band without the band being in a high angle of inclination, then a sell order is placed in order to benefit from the downhill.
Other meanings of Scalping
The term scalping is also used when referring to some form of market manipulation. This is considered frauds carried out through the acquisition of a stock for a short-term transaction, and then advertise the same transaction as a long-term position to a larger class of investors with the intention of reselling the stock immediately after it has risen in value.
the Analyst's answerJean Grossett - Financial analyst
Before adopting a scalping approach to trading, it is important to have a deep understanding of the spreads of currency pairs that such a strategy is best suited for. A trader should also decide between a small fixed spread with annual commission as in ECN brokers and variable spreads from a market maker broker. I will suggest the ECN brokers, considering the fact that trade slippages are reduced to a minimum.
the Manager's answerRobert Danvil - Investment Manager
Human traders generally like to see quick returns on investment, hence they often resolve to a scalping strategy. This trading approach requires a high level of discipline, and mental toughness because it can be very stressful and rewarding at times.
Most successful scalpers usually adopt a fully mechanical approach when trading manually, or an automated or semi-automated approach using expert advisors (EAs). This is done to reduce human errors to a low degree, since programs do not have emotions and are better at crunching numbers as well as executing logical operations.
Finally, carrying out back tests of the scalping strategy on historical data of different securities/ currency pairs is very important in order to have a clear view of probable expectations from the approach. Risk management and money management strategies when using this approach cannot be over emphasized. Setting clear levels for stop loss and take profits. In the case of a scalping strategy whereby the loss is more than the gain in terms of risk to reward ratio e.g. 1.5: 1, a high reliability scalping strategy of between 80%-90% reliability is recommended for success.