Even the most inexperienced Forex traders have heard of a scalping strategy, although most of them would be hard-pressed to explain what the term means exactly. Scalping is an easy technique to use, that is why it is so popular among Forex traders, although stock traders also use it. Before we go into explaining it, there are a few things you need to be aware of, if you are planning on using it. Scalping is both time-consuming and labor-intensive, so if you are not able to fully dedicate yourself to it, it may not be the right approach for you. The reason for this is that the positions are held for just a few hours at most. The longer a trader holds his position, the bigger are chances of losing money on a trade, due to the volatility of the Forex market. That is why it is only used by traders who can spare enough time to watch the maker movements closely.
In the simplest of terms, scalping can be described as a trading strategy based on real-time technical analysis. The basic idea is to make a profit off the tiniest moves of the market, hence scalping. The notion of taking just a little off the top isn’t new in trading, but scalping was the first term that fully defined it. The trader makes a series of trades, each yielding a small profit. Positions are held shortly and executed as soon as the value goes up. By performing as many of these as possible, a tidy profit can be accumulated at the end of the day. For this to work, a trader must be disciplined and have strict exit parameters, which must be obeyed. Other ways, a risk of one loss, even a modest one, can jeopardize the whole approach.
How Does it work
Scalping works by executing trades that bring a very narrow margin of profit. That margin can be exploited by increasing the value of the position, but it requires large sums of money to be available. The main premise of scalping is short exposure. By decreasing the time the trader is exposed on the market, it is possible to significantly reduce the risks. That is why most scalping strategies require a window of just a few hours to be successful. The second important fact that allows scalping to work is a small movement. Put in simple terms, this means that a stock changes value by a big margin very rarely. For example, an increase of $10 in stock price can happen once a year. On the other hand, a change of $0.01 is fairly common and happens almost daily for most stocks, thanks to supply and demand. This is the margin scalping exploits.
Choosing A Scalping Strategy
There are several scalping strategies used today, but first, let’s focus on general characteristics. Any successful scalping strategy must take into account the type of market, its volatility, and the type of commodity being traded. Some work best on the Forex market, others are designed specifically for stocks and shares. Before choosing one, it would be smart to read up on all of them. This way you can determine which one is the best for you.
Scalping with Stochastic Oscillator
A stochastic oscillator is a tool that allows traders to predict price movement by comparing the current price with changes in value in the recent period. Like all other tools, it isn’t 100% correct every time, but it can give a fairly precise indicator of the way a stock will move. Once you get the hang of it, you will be able to determine whether the data it provides is a good or bad one. More importantly, it can help you predict the moment when the trend is reversed, allowing you to be ready with your trade. This way, you can determine when to buy and when to sell your position for maximum profit in a short time frame.
Scalping with The Moving Average
Another popular scalping strategy uses a moving average. It aims to accomplish the same goas as a scholastic oscillator, but with a different approach. It uses two short-term points to predict the change in value, as well as a third, long-term one, which is used to predict a trend. Catching a trend is the important part, as it will allow you to ride it and not catch every single minuscule change in value.
Like all other trading strategies, scalping has its advantages and disadvantages. Understanding both is key to suing it successfully. To be able to anticipate market movements, a scalper must have a thorough knowledge of positions they are planning on taking. Often, decisions must be made in an instant and that is only possible with a systematic approach and a lot of testing and investigation into the matter. That means you will spend a lot of time staring at various charts while preparing your moves and even more while executing them. That is why only the most disciplined traders can extract profit from scalping.