Scalping Trading Strategy Explained

The scalping strategy is a straightforward strategy that is mainly used Forex trading. Traders place numerous trades and set very tight stop loss signals within a very short time. The aim is at making as many small profits in a short period. These ultimately add up to a larger amount, so that this strategy can also be worthwhile. In any case, you must bear in mind that not all brokers allow scalping.
In many cases, brokers applying a market maker brokerage model do not permit scalping. The problem is that these brokers cannot react as quickly as they would have to to protect themselves from losses. If the trader makes a profit, this can mean a loss for the broker.

Find the best Brokers for Scalping with our review

To be successful with scalping, you should choose a broker that offers fast order execution. Only in this way can scalping ultimately lead to success, as trading is often only carried out at short intervals so that current prices are of great importance. With an ECN broker, you are the right trader in most cases, as the trades are directly passed on to the market. In the following, you can find important information about the scalping strategy and thus sufficiently deal with this trading strategy.

The application of the scalping strategy for traders at a glance


The scalping strategy can be implemented and used by you as a trader in five short steps. Currencies with high volatility are very suitable for this strategy, including pairs with the yen (JPY). The M1 is well suited as a timeframe, and smaller frames are also a possibility to benefit from the scalping strategy. As a trader, you should also keep an eye on the Frame M5 and M15 so that you don’t miss any details. During the European/US/Asian session, the scalping strategy is particularly suitable.

Before using this strategy for the first time, it is advisable to first look at what is happening on the market. A period of a quarter of an hour is usually sufficient for this. You can then place your trades and the respective stop-loss limits. This should be at a maximum of 10 pips so that the limits are very tight. This offers the highest potential for trading with the scalping strategy. A take profit cannot always be used with the scalping strategy so that a manual closing of the transaction is often required. Once the profit reaches a value of 1 or 1.5 times the spread, most scalpers would close the trade.

Advantages of the scalping strategy and possible disadvantages


The main advantage of the scalping strategy is that it requires very little preparation and is also very easy and quick to apply. Those who are familiar with this strategy can achieve high profits within a short time. You should only study the market a little in advance to get an overview. Even comprehensive analyses such as a technical analysis are not necessary for the scalping strategy. However, there are several disadvantages that you should be aware of when considering the scalping strategy for your trade.

The disadvantages relate to the fact that not all brokers have the possibility or permission to conduct scalping. This is the responsibility of the respective broker and should be clarified beforehand if possible. Trading with this strategy also takes a lot of time and you also have to accept a loss of profit due to spreads. The ratio between risk and profit is, usually low, which means that scalping cannot be worthwhile in every situation. Overall, however, this strategy offers potential due to its simple implementation and is often fascinating for many types of traders.

Forex Indicators and their Use in the Scalping Strategy


In many software for trading – including the MetaTrader – you as a trader can access various indicators to align your trading with foreign exchange better. To benefit from this in your scalping strategy, you should take a closer look at the individual indicators to determine which ones can be of use to you. This is far from being the case for all indicators. On the whole, you can benefit from different indicators in scalping if you use them sensibly and if they make sense together.

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The individual indicators have been known since the 1970s and thus date back to the time when the stock market was linked to computer technology. Since then, there are numerous indicators that you can use as a trader for trading. They make analysis easier and have mainly been of interest to traders since the 1980s since they have also been easy to use. The softening of exchange rates has also contributed to the fact that indicators still have a great and important significance for you as a trader today. Although not all indicators are considered in the scalping strategy, there is also vast potential here.

Overview of essential indicators in Forex


More than 200 indicators are available to you as a trader within the MetaTrader 4 platform alone. Therefore, it is difficult to list all possible indicators, so it is only a small overview. The following indicators, among others, are important for the scalping strategy.

Trading with RSI: In this way, you can recognize an overbought or oversold state of the market. RSI stands for Relative Strength Index, and in many cases, this indicates a trend change that you can use for trading.

Moving Average: This is one of the most important indicators of all and plays a vital role in Forex trading. The indication of the moving average is also important outside Forex trading.

MACD: If the moving average is running towards or away from each other, the MACD indicator shows this. In Forex trading, this is probably the most important factor you should know. Among other things, MACD can represent the changing momentum very well.

Stochastic: You can also identify overbought and oversold markets and trading situations with Fast or Slow Stochastic. The necessary lines in the charts become visible very quickly. This can be an advantage for you in any case.

Scalping is not suitable for all traders equally


Due to the different disadvantages, one must always consider whether using the scalping strategy is an option for oneself. With scalping, there can also be a series of losses, which of course have to be taken into account. A comprehensive analysis is just as important as experience. Without prior knowledge, you as a trader should not necessarily rely on this strategy despite the simple principles. It is also necessary that you can analyze the charts quickly and that you can recognize patterns without any problems.

Get to know and learn scalping with a demo account


When selecting a Forex broker, it may be advisable for you as a trader not only to pay attention to the conditions or other offers for trading. In many cases, dem o access can also be useful for you, with which you can learn and get to know the trade. In this way, you can also quickly find out what trading options are available and how to deal with the trading platform. But you can also try strategies like scalping with a demo account and familiarize yourself with them.

You can usually open a demo account quickly with those brokers who offer one and thus get to know the trading environment without many detours. Without any financial risk, you can simulate trading with virtual capital and use strategies to test or adjust them for live trading later. This is of course, also possible with the scalping strategy. However, please note that not all brokers offer demo accounts.

Scalping – a strategy for the quickest of hands


We have all heard the saying “scalp someone” or “pull someone’s fur over their ears” before. Especially concerning the Wild West. If you translate scalping into the German language, you get “cut out”. In our case, scalping has nothing to do with the Wild West. Let’s ride together into the sunset and take a closer look at the depths of scalping…

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What is Scalping


In our case, it is a trading strategy based on real-time technical analysis. Scalping can usually be found in intraday trading. The main objective is to generate profit by buying and selling currency pairs. This often happens over a short period. So traders cut themselves the smallest profits out of the trades. Traders who follow this strategy are called scalpers.

The investor often uses the smallest price fluctuations of a security. These are usually the smallest minimum price variations from the movement of value. The value bought or sold is then usually closed out again a few ticks later. Also, scalpers try to use the spread (the price difference between bid and ask) for themselves. At the same time, they try, among other things by looking into the order book, to anticipate price movements of only a few ticks in one direction or the other and to position himself accordingly.

To be successful with this trading method on the stock exchange, large capital movements are necessary. That is why this procedure is usually used in Forex or CFD trading. Scalping is one of the more aggressive strategies.

The principle


Scalpers buy market-owned shares of mostly smaller companies at a favourable price. Subsequently, they deliberately distribute positive reports about the securities they have bought. They thus recommend them to the general public.

As a result of the subsequent increase in demand, the price rises until the originators of the scalping sell their shares again and reap a price gain. This is, of course, the result of demand from investors induced to buy.

When prices fall sharply again, investors who have relied on positive news often suffer a heavy loss. In the figurative sense, the “fur is pulled over their ears”.

The holding period is extremely short, and the open positions are usually closed after the spread has been recovered.

The Charts


The requirements of the chart settings result from the short-term time horizon: Charts are used in time intervals of up to a maximum of 5 minutes, whereby tick charts and second charts are the rules. The profit potential of each individual position, which is limited by profit-taking, and the generally applicable ratio of trade ratio and payoff ratio result in correspondingly strict requirements for loss limitation:

If a position does not immediately develop into the positive range, it is closed out by Stop Loss. The maximum loss accepted per position may not exceed the planned profit per position and should be better set below it, because otherwise the demands on the “hit rate” increase enormously.

Large individual losses are prevented by the loss limitation with stop-loss orders and large individual profits do not occur due to rapid profit-taking: The majority of the positions are closed again within a few minutes.

Where to find scalpers?


Scalpers usually move in the more liquid markets, such as forex trading or blue-chip stocks. Here, you are urgently dependent on immediate order execution.

An example
A scalper makes ten trades with five pips profit. If it were to allow a loss of 20 pips, for example, the profit from four successful trades would already be gone. If he allowed such a loss trade afterwards, almost the entire profit from the previous trades would be gone.

Characteristics
Scalping has four characteristics.

  1. Fast
  2. Trader must have precise timing and precise execution
  3. 1:4 Margin
  4. Requires a lot of experience.

Due to the short holding period, scalping is a speedy and stressful strategy which needs a lot of experience. The scalper must have a lot of experience in the field of hardware and software (i.e. the trading platforms and their possibilities). At the same time, he must have a fast Internet connection, a reliable quote data supply and, last but not least, a reliable broker to supply him with such data.

The M1 Forex Scalping Strategy


Within scalping, there are some paths that are repeatedly taken by scalpers. Strategies within a strategy, if you will. We want to introduce the most common one.

This strategy is especially suitable for beginners. Despite all this, like everything else in scalping, it needs time and concentration. The most important aspect is the number of trades. That means a lot of trades equals a lot of profit. Here, traders usually place up to several hundred trades in one day and usually choose brokers with low spreads and low commissions.

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Entry points


There are three signals within the chart. First, we look at the indicators and wait until the 50 EMA is above the 100 EMA. This is usually the first signal. From here we wait until the course returns to the EMAs. That’s the second signal. The third signal results from the stochastic oscillator. Here we make sure that the line crosses the 20 level from bottom to top.

The moment all three elements provide the correct signals, you can enter a long position. To stay on the safe side, setting a stop loss is crucial. The stop is placed about 2-3 pips below the last price movement. We expect a gain of 8-12 pips, which is also the take profit.

Drawbacks


In short: Scalping is stress. What do you mean? Well, as a trader, you first have to make a larger deposit as you are opening several positions at the same time. But that doesn’t mean you have an advantage, on the contrary. Private scalpers are ordinarily at a disadvantage, as bankers usually get the information they need faster and receive more information.

If you are not yet familiar with scalping, it can be challenging to maintain the risk-reward ratio under enormous pressure. At the same time, it is more difficult to determine the ideal threshold for the stop loss.

All in all, scalping is a trading strategy that requires high-stress resistance and self-discipline. So just something for the fast with healthy nerves.

Procedures and entry signals


There are two approaches to scalping: the procyclical and the countercyclical. You should know both if you are interested in scalping. Both have their peculiarities, which we want to take a closer look at here.

Procyclical
In the procyclical approach, traders trade the breakouts from the first 60 minutes candle. The other possibility is to trade the breakout through the daily low or the daily high of the previous day.

Anticyclical
With the anti-cyclical approach, the trader speculates on the tops and lows of a movement. This means that he tries to get a share of the profit in the backstabbers of a movement. They speculate in the sideways actions on their continuance, enter at the high of the range a short position and a long position at the low.

For movements up to the daily high or daily low, they wait to see whether there is a false outbreak. It is often seen, for example, that the price goes above the daily high of the previous day, but then the prices come back, and at this point, the anti-cyclical scalper takes a short position.
This setback is triggered when the orders are filled, and the excess demand resulting from the many positions around the daily high becomes an excess supply and prices return.

Only one procedure is too easy for you? Then, of course, you can choose the best of both ways and combine both. It is always worth a try (a demo account helps).

Who is scalping suitable for?


Scalping is suitable for everyone if you know and fulfil the requirements.

Professional traders usually have little time and still, want to keep their finger on the pulse of the market, but do not want to rely on algorithms.

Beginners have the advantage that the maximum losses are lower due to the strict loss limitation.

Tips for beginners


Prospective traders should be aware of one thing: Not every broker is prepared for this trading technique. There are even some companies that do not accept this approach. If you would like to become a scalper, you should first contact the respective support before registering and clarify this topic.

The problem is that not every broker is directly linked to the interbank market and can offset the positions of scalpers against those of other traders promptly.

As with any strategy, it is advisable to first try it out with a demo account.

Bottom line


Scalping is fast, stressful and potentially profitable. However, you should also know what the risks are and what the prerequisites are for this strategy. As always, keep in mind that trading Forex, CFDs and other complex financial instruments is risky and can lead to a full loss of your investment.

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