Not all traders have an opportunity to always keep an eye on price charts and open trades when it is time, but everyone wants to make money. As a result, they choose trading systems that allow looking at the chart rarer.
If the trader can afford to look at the chart once in a couple of hours, they must choose a trading system for a large timeframe, H4 or D1. The drawbacks of large periods are a small number of trades and the necessity to place Stop Losses far from entry points. Hence, you cannot count on an amazing profit in a short time.
However, I am sure that each trader has several hours a day to keep monitoring the market situation. This requires a special trading method that gives many signals in a short while. Such a method is called scalping.
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What is scalping?
Under scalping, we mean opening and closing positions frequently, aiming at a profit of 1–5 points, in a short time. Sometimes trades in this method last several seconds, and if you use an automatic trading system, the life of your trades might shrink to parts of a second.
👉 Also you can find a guide for scalping in trading in this post.
Main scalping methods
There are four methods of scalping.
Scalping with the market depth
The first method implies work with limit sell/buy orders. They can be seen in the market depth. Analyzing the market depth, the trader waits for a moment of an imbalance of supply and demand that can push the price in a certain direction.
For example, in the picture, you can see that at the level of 52.00, there are sell orders for 26,000 stocks total, while at 51.99, there are only 200 stocks to buy. There is also a small volume to buy at 51.98, and the next order is at 51.59 only. In such a situation, it is much easier for the price to go down because it has fewer obstacles for growing than for falling.
For the price to rise above 52.00, there needs to appear a buyer (or buyers) who could close the order for 26,000 stocks. In such circumstances, the trader decides to open a selling position with a Stop Loss at 52.01. Thus we risk 1–2 points while the probability that the price will go down is rather high. Such situations are not frequent but everything happens very fast, so the trader needs excellent reaction and immaculate trading gadgets.
Scalping with the correlation of financial instruments
The second method implies looking for impulse movements. For example, the trader simultaneously tracks several assets that correlate. At a certain point, 3 out of 4 instruments start going upwards while the remaining one sticks in place. This results in a so-called delayed reaction of traders. They quickly notice the imbalance and buy the stock that remained in place. A couple of minutes later, the stock recovers positions, and the traders take the profit.
Look at the picture. It shows correlating stocks of US airlines. The stocks of Southwest Airlines Co. (NYSE: LUV), American Airlines Group Inc. (NASDAQ: AAL), Delta Air Lines, Inc. (NYSE: DAL) at 7:50 p.m. traded above their resistance levels, while the stock of United Airlines Holdings, Inc. (NASDAQ: UAL) had not reached its resistance level yet. As a result, 5 minutes later, the stock covered 18 points and got to the resistance level.
Scalping with the correlation and market depth
The third method combines the previous two: it uses market depth analysis for finding an imbalance of supply/demand, while the correlating instruments show to which level the price might grow/drop. However, this is a more complicated method, and it is difficult to find a moment when all conditions coincide: you must keep an eye on several instruments simultaneously.
Scalping with indicators
The fourth method of scalping implies using indicators for finding entry points. For analysis, very small timeframes, such as M1 or M5, are used. Moreover, modern trading platforms allow splitting timeframes by 10 seconds, while some traders prefer tick charts.
In the picture, you can see a EUR/USD chart, timeframe M1. For analysis, very popular indicators, such as the Moving Average with period 200 and the Stochastic Oscillator with standard settings, are used. The Moving Average shows the direction of the current trend, while the Stochastic, by reaching the oversold/overbought area, gives a signal to open a position by the trend.
In the picture, the time is between 6 and 9 p.m., when most traders come back home from work. During these three hours, there appeared 12 signals to sell, and as long as scalping presumes making small profits, almost all the positions except for two closed with a profit. In the end, three hours of scalping could have brought you a noticeable profit.
Any tech indicator suits scalping, the main requirement is a small timeframe where the indicator will offer a lot of entry points.
Mistakes in scalping
The main mistake of a scalping trader is an attempt to catch a large movement. As a result, a small profit by the trade is not taken, while the price reverses, and the position closes with a loss.
Another common mistake is entering the market too early. Wait for all trading conditions to be fulfilled before you enter the market and, most importantly, close your position in time.
Advantages of scalping
Scalping allows the trader to work when it is most comfortable for them. As long as you hold positions for a short time, your risks are naturally low, because if you close with a loss, it is also small.
You open a lot of positions in a short while, and each of them can bring you a profit from several cents to several hundred dollars, depending on the trade volume. As a result, your daily profit might reach thousand dollars.
Also, scalping allows using leverage in forex, increasing your profit per trade.
Drawbacks of scalping
An important criterion of successful scalping is making trades on time. Hence, you need a high-speed internet connection and decent hardware/software.
Nowadays, thanks to technological development, automatized trading has become popular. Hence, traders compete with robots that react faster than humans. However, this is valid for the work on market depth only where traders compete for pips, not points. Hence, a trader needs to find movements for several points.
For a beginner, scalping is a good option for work in financial markets. Here, one does not need to study financial reports of companies or listen closely to the comments of Central banks, wondering what they actually mean.
Scalping means working with digits understandable to everyone who knows to count. After all, you can study several indicators and them to a small timeframe to get started.
Scalping lets you stop thinking about your trading as soon as you close the terminal because you have no open positions left; hence, you can have a good rest and start a new trading day, as efficient as the previous one.
By Dmitriy Gurkovskiy, Chief Analyst at RoboForex