Investors and traders that are part of the financial sphere have one common goal in mind – they are doing their best to increase their initial capital. To do so, they use different investing or trading strategies. Over the years, some of these techniques and methods have proven to be working better than others.
For instance, one of these techniques is called “scalping.” This trade management strategy allows traders to make small profits quickly. When used in reference to trading, scalping may refer to two things. However, if you are new to the Forex and Cryptocurrency sphere, then you might not be familiar with this trading philosophy.
If that’s the case, don’t worry. In this article, we will explain to you what scalping is and how it is being used in the financial world. Also, at the end of this article, you will have enough information to decide if this method is right for you. Are you curious about how scalping works?
What is Scalping?
As we mentioned above, scalping is a trade management strategy that may refer to two things. For example, scalping may apply to a legitimate method of arbitrage. On the other hand, this trading philosophy may also refer to market manipulation.
Essentially, scaling focuses on identifying fluctuations in price. Further, it is the shortest time frame in trading. As such, this trading approach limits the potential liability of each trade. Also, it shows the small changes in currency prices.
With this method, forex scalpers profit off small price changes. Typically, they hold onto the trades for a time frame between a few seconds to a few minutes at the most. Basically, traders who use this trading methodology are trying to grab small amounts of pips. They do this as many times as they can throughout the busiest times of the trading session. In the end, small quick profits add up.
However, this strategy requires traders to have a strict exit strategy. Otherwise, they might end up losing the many small gains. For this strategy to be successful, forex scalpers also have to use the right tools. For example, a live feed, candlestick charts, and a direct-access broker are a must.
Moreover, traders who use scalping believe that taking small profits repeatedly limits the risk. Also, it creates an advantage for them. For example, this trading methodology limits the market exposure. In other words, traders are vulnerable to short-term market volatilities.
Another benefit of using this trading philosophy is the ability to profit from slow or rotational markets. During such markets, there are many small movements. Of course, an experienced forex scalper can exploit those small movements. Moreover, they tend to be more frequent than more significant changes. In short, scalping can be used as a primary or supplementary trading strategy.
How Does Scalping Work?
In short, scalping is the process of identifying fluctuations in price in the shortest period of holding time, which results in profiting off those small price changes. Forex scalpers should do this for as many times a day throughout the busiest times of the trading session.
Typically, the goal is to buy or sell several shares at the bid/ask price. Hold onto the trade for a timeframe between a few seconds to a few minutes at the most and then quickly sell them a few cents higher or lower for a profit. In rare cases, the holding time can last up to several hours.
Furthermore, forex scalpers should have a strict exit strategy. At the end of the trading session, small profits add up. It is essential to note that the last position should be closed before the end of the total market trading session, which can extend to 8 p.m. EST.
Is Scalping The Right Strategy For You?
To be a successful forex scalper, you have to know the market well. Also, you will practically be glued to your chair while watching the charts. So, unless you are focused, this strategy won’t be profitable. Your undivided attention is a crucial factor when it comes to scalping.
Further, scalping might be useful for you if you:
- Have no problem spending several hours focusing on your charts
- Are a quick thinker
- Can stay calm in fast-moving environments
- Like making trades that bring small profits
- Can quickly adapt to changes
However, if you get easily stressed or can’t stay focused for several hours, or you need time to analyze the overall picture of the market, then you are probably not a forex scalper.