Scalping is a day trading strategy that involves opening and closing trades within a short period of time. Scalping is different from other types of day trading strategies in terms of holding periods and market analysis.
With most day trading strategies, trades can be held even for a couple of hours within the same trading day, with traders analyzing the market using both fundamental and technical analysis methods. But with scalping, trades are held for a few seconds or a few minutes; and scalpers almost exclusively use technical analysis methods because of the short holding periods of their trades.
The goal of scalping is to capture small profits by taking advantage of small price movements in the market. Scalpers open a large number of trades with the hope that the small profits captured will eventually add up to a large profit amount at the end of the trading session or trading day.
The logic for scalping in the market rather than tracking the market for big moves is that small price changes happen a lot more in the market than big price movements. A typical scalp trade will be closed when the asset price moves just above the breakeven point. This essentially means that as soon as the spread is covered, the target is reached and one can now exit the trade with a small profit.
Scalping can either be done manually or automatically. It takes an experienced trader to manually scalp efficiently. This is because the strategy requires speed, focus, patience, and deep trading knowledge to effectively monitor the market and look for profitable opportunities within short periods of time.
This is why the bulk of scalping activity is often done using scalper bots designed to trade the market mechanically based on coded algorithms. For scalping, automated trading makes a lot of sense because it guarantees speed and efficiency in both order entry and exit. The scalper bots also ensure that consistency in strategy application is achieved.
Pros and Cons of Scalping
Pros of Scalping
- Lower Risk Exposure – Scalping ensures that you are exposed to less risk in the markets because of the short holding periods.
- Potential for Higher Profits – There is potential for higher profits when scalping because it does not depend on big price movements in the market.
- Higher Win Rate – Your win percentage will likely be higher than other strategies because scalping only targets small profits per trade.
- Allows Multiple Trades – Scalping allows you to take advantage of as many lucrative trading opportunities during any trading session as possible.
- Fundamental Knowledge Is Not Required – When scalping, you do not need to have a deep fundamental knowledge of the asset you are trading because trades will only be held for short periods and based purely on technical analysis setups.
- No Rollover or Swap Fees – There are no other extra charges apart from spreads because no trade is left running overnight.
Cons Of Scalping
- Requires Great Effort – Scalping is an inherently daunting strategy that requires great concentration as well as the patience to repeat the same things over and over again.
- High Spread Fees – Scalping involves making lots of trades, which means that eventually, the spread fees can add up to a really big amount.
- Time-consuming – Scalping is time-consuming and requires traders to constantly chalk up so many screen hours.
- High Drawdown Potential – Scalping tends to be done using relatively higher lot sizes. This means that a series of losses can leave a big dent in your capital.
Scalping Trading Strategies
The nature of scalping means that it can only be done successfully in markets that meet certain conditions. The first condition is high liquidity. The higher the liquidity of an asset, the tighter the spreads. Highly liquid assets ensure scalping is efficient because the spreads are easily covered by a minor price change. Volatility is also a major consideration. Scalping requires relatively stable volatility because sharp or choppy price changes can be very risky for traders.
Here are some of the best markets for successful scalping:
Forex scalping can offer many opportunities because the market is active round the clock. However, the best forex scalping strategy is to concentrate on major currency pairs such as the EURUSD, GBPUSD, and USDJPY. These pairs have sufficient liquidity throughout and can be traded with very low spreads. The forex market is also highly leveraged, which means that scalpers can significantly amplify their profits (and losses) even on small price changes.
It is also advisable that forex scalpers avoid trading minor currency pairs such as the GBPJPY, EURGBP, and EURAUD; as well as exotic pairs such as the EURTRY, USDHKD, and GBPZAR. These pairs tend to be less liquid and their price action is very unpredictable. They also feature high spreads, which make them very risky assets for any meaningful scalping activity.
Stocks are some of the most popular assets for scalping, and they feature high liquidity as well as high trading volumes. This means that scalping stocks can be potentially lucrative. Some of the best stocks to scalp include Tech stocks such as Facebook, Amazon, and Apple; as well as Banking stocks such as JPMorgan Chase and Wells Fargo. These stocks are influenced by predictable factors which ensure that their price action is stable and less vulnerable to choppy spikes.
Indices are statistical measures designed to track the performance of a basket of stocks. Indices cannot be bought directly like stocks; instead, investors get exposure to them by buying index funds or rather investing money with the underlying investment firm that allocates capital to the individual stocks.
Indices are particularly attractive for scalping because the amount of activity that happens within individual stocks almost guarantees that there will always be decent volatility and liquidity throughout. This also means that the price action of indices is more stable and predictable, with no single stock able to heavily influence the overall price of an underlying index.
Scalping with AvaTrade
AvaTrade is a global forex and CFDs brokerage firm that allows traders to speculate on the price changes of approx. 1000 financial assets that range from Stocks and Forex to Indices, Commodities, and Cryptocurrencies. This ensures that investors have a wide selection of trading instruments that are ideal for scalping as well as various other trading strategies.
Here is why AvaTrade is your ideal scalping partner:
- Regulation –
AvaTrade is regulated in multiple jurisdictions around the world, which makes the company a reliable, trustworthy, and transparent brokerage services provider.
- Trading Conditions –
Optimize your scalping with attractive trading conditions such as low spreads, transparent pricing of assets, as well as fast execution on all entry and exit orders.
- Multi-platform Functionality – AvaTrade has a variety of trading platforms that are seamlessly accessible on both mobile and desktop devices. This aids in successful scalping because traders can enjoy similar functionality across all devices.
- Free Demo –
Develop, test, and tweak your scalping strategies risk-free with a free demo account.
- Educational Resources –
Access our comprehensive and regularly updated education section and learn about scalping strategies, tips, and tricks that can be applied in the markets for effective trading.
- Professional Support –
Enjoy reliable, multilingual support during business hours via chat, email, or direct phone calls to your personal account manager.
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