Pros And Cons Of Forex Scalping Strategy
Scalping is a short-term trading strategy that includes opening and closing frequent trading positions on one or more currency pairs in the course of one day and aims at making profits from small fluctuations in the price value, instead of waiting for a big opportunity for trading. The traders don’t hold the position for a longer period of time like in swing or position trading strategies but hold the trade for a shorter time frame of 1 minute to 15 min. Scalpers generally place between 10 and 100 trades in order to gain large overall profits.
What is scalping?
Scalping is a trading style in which traders open and close multiple trading positions with the goal of making profits from minute fluctuations in prices. The traders using the scalping trading strategy are known as scalpers. The main aim of the scalper is to gain multiple small profits in a few pips rather than fewer big profits.
The profits made by scalpers being very small are calculated in pips which is a unit for measuring the smallest change in the price value of the currency pair which is one-hundredth of one percent and appears in the fourth decimal position. E.g., EUR/USD. The exchange rate fell from 1.3980 to 1.3979 then the currency pair fell by 1 pip.
Another important aspect of scalping is ‘leverage’, which allows scalpers to open higher positions with less capital. But, leveraged trading also results in greater risks, which is why scalpers implement a strict risk management strategy to mitigate the risks.
Pros of Scalping Trading Strategy:
1. Scalping helps traders to bring small and consistent profits, unlike other trading strategies that can take up to days or even weeks. Scalpers can make really good overall profits with a good exit strategy. Most professional traders scalp due to its consistency.
2. Scalping enables traders to make profits with lower-risk trades. Scalpers open small position sizes w.r.t their account size which lowers the risk. Traders use stop-loss and confine the risk up to the current open trade which does not affect the trading account.
3. Scalpers do not wait for any drastic price movement in the market to be profitable. As scalpers aim at making small profits in pips, they require the market to move a few pips to reach their goal.
Cons of Scalping Trading Strategy:
1. It is difficult to anticipate the market movement on a minute-to-minute basis. It is also difficult to use technical indicators and study the chart patterns in such a small period of time.
2. Scalping requires traders to be consistently profitable to accumulate overall profits.
3. Scalpers need to have good trading psychology. Emotions can influence trading decisions and eventually lead to failure. Good trading psychology also enables the trader to follow a strict exit strategy.
Prerequisites for Scalping:
1. Advanced charting tools: Scalpers heavily rely on technical analysis and require advanced charting tools and technical indicators. They need real-time price updates for trading in 1-min to 15-min time frames. Any lag can lead to the failure of the trade.
2. Patience and witty nature: Traders following the scalping trading strategy should be patient to log in full-time in front of the screen and wait for the right trading opportunity. Scalpers should have quick thinking and decision-making ability to make trades effectively.
3. Fast execution system and direct access to the market: Traders looking forward to making profits from scalping should prefer trading systems that have high execution speed. They can prefer ECN brokers that allow traders to buy and sell without any middlemen, which increases the speed of the execution of the trade. They provide direct access to the buyer or seller in the market without involving any re-quotes. Because of the fast execution speed provided by the brokers, the spreads also become tighter.
There are many ECN brokers with spreads starting from 0 pip and have high execution speeds:
Scalping is no doubt a great trading strategy, but in order to carry it out successfully, traders must know which currency pairs to trade, which session to trade, when to enter and exit a trade and how to follow good money management. It’s a fast-paced strategy and traders who can keep up with it will only get the desired results.
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