As the saying goes, there is more than one way to skin a cat. Scalping is a popular trading approach in forex because of the quick realization of profits. Unlike more long-term strategies like swing and position trading with high levels of uncertainty, scalping presents a constant flow of opportunities.
Despite the tremendous attraction of being a scalper, it’s still a very difficult way to trade forex due to numerous factors. This article will cover the seven things traders should observe before becoming a scalper in forex.
- Developing the right personality
Each trading approach in forex comes with unique personality traits. For instance, swing and position traders are naturally very patient, relaxed, and comfortable taking only a handful of positions.
On the other hand, a scalper is inherently a quick thinker, likes the fast-paced nature of the markets, and is a bit of a risk taker. Furthermore, scalping is physically intensive and requires a high degree of concentration.
- Decreasing spreads and commissions
One of a scalper’s biggest’ enemies’ is trading costs, namely spreads and commissions. Since scalping involves holding positions for small targets, spreads and commissions can easily take a big chunk of the profits.
This is further negatively compounded when such costs typically increase during busier trading periods, such as session overlaps and high-impact news releases. Also, scalpers are more exposed to events of slippage.
Therefore, the first must-have for a scalper is using a fixed or zero spread instead of a variable spread or standard account.These accounts allow for even tighter spreads, which should lower costs and increase profits overall in the long run.
- Trading in the most optimal market times and conditions
After selecting a fixed or zero spread account, scalpers should only trade during specific liquid periods with identifiable market conditions. Although some believe scalping is worthwhile at any time, it works better at specific times.
It is more difficult to scalp in a sideways market as price will move or consolidate in a range that tends to cause whipsaws. Also, some sessions are inherently less active than others, e.g., the Tokyo session.
Generally, the best times for scalping are during the London, and New York sessions, as most of the volume in forex is trading during these stages. Depending on the strategy, a scalper will want to identify possible trending conditions and execute when trading activity is at its highest.
Again, other scalpers only scalp exclusively in high-impact news releases because price often moves the most at these times. While scalping is about frequent execution, it can be physically demanding if the scalper trades every possible move.
Therefore, scalpers should develop the know-how of knowing when to scalp and when to sit on the sidelines.
- Specializing in a handful of pairs
One of the highlights for scalping is focusing on a few currency pairs, with some even sticking to one. The most popular markets for scalpers are the majors; EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/CAD, USD/CHF, and USD/JPY.
Scalpers choose these instruments mainly because of their high liquidity and cheap spreads. Analysts don’t usually recommend scalping with other pairs like the minors, though yen pairs like GBP/JPY may be favored by some for trading during the Tokyo session since they can be more active at this time.
Regardless, a scalper will want to stick with no more than five markets to allow themselves greater study in any unique behavior and lessen transaction costs.
- Choosing the right time-frame
After deciding on the pair or pairs, a scalper must select the best time-frame. Generally, since scalping involves small and recurring profits, it’s best to analyze and execute on lower time frame charts, namely any time-frame from the 30-minute down to the 1-minute.
It will take time for one to be adept with the erratic nature of these charts since they involve a lot of noise and whipsaws.
- Ensuring the broker allows scalping
Although most brokers welcome a variety of trading styles and strategies, some do not allow scalping. This is usually the case when the broker is primarily a market maker or dealing desk.
These dealers act as the counterparty to their client’s positions and want to maintain a balanced book. Due to the high frequency of scalping, it becomes challenging for them to hedge the net exposure, exposing the provider to potential risks.
A scalper will want to view if their broker has any policies and restrictions on scalping. Though many forex brokers permit any trading method in most cases, meaning there will always be a sizable choice.
- Implementing a favorable risk-to-reward ratio
Every trader should have a good risk-to-reward ratio, but it is trickier to maintain with scalping due to the frequent execution. For starters, as most scalpers typically enter with one-click trading, they might not have enough time to place a stop loss.
Applying a stop loss with a market order is imperative so that scalpers do not go into unexpected losses in the likely case markets become too volatile. Moreover, they must also maintain a potential reward that is at least half the value of their risk or more.
Just like any trading style, scalping has requirements only unique to it. It’s about balancing the inherent advantages with the disadvantages. While scalpers can make quick, sizeable gains, this is counteracted by ensuring the risk does not become uncontrollable, especially during erratic movements and unfavorable volatility.
Though scalping presents never-ending opportunities, a scalper should still be selective on when they trade and possess a high concentration level. These are a few examples of the good and bad aspects of scalping, all of which need to be thoroughly considered.