A trader’s guide to scalping

The principal aim for scalpers is to achieve as many small profits as possible, rather than long-term trading strategies that aim to achieve a small numbers of wins but on a much larger scale. This way, they are able to dip in and out of the market more flexibly.

Scalping is a preferred trading strategy for some traders due to the theory that small price changes are easier to predict than larger ones, and some short-term strategies propose less risk. As there is a very limited time exposure to the market, scalpers are less likely to run into overwhelming changes and pitfalls. However, scalping can also present risks from market volatility, as scalpers tend to trade in highly liquid and volatile markets, and this can result in losses.

In particular, scalping strategies are used within the commodities and foreign exchange markets, as these assets are known to fluctuate regularly. Commodities such as gold and cocoa and currency pairs including the USD/EUR can change rapidly in price over a short timeframe, depending on supply and demand, as well as more fundamental and economic indicators.

Scalpers trade derivative products such as spread bets​​ and contracts for difference​ (CFDs) on the price movements of an underlying asset, whether this be a currency pair, share or commodity, instead of owning the physical asset. This allows them to trade with leverage, which can provide huge profits if the trade is successful, although losses will be magnified if the markets move in an unfavourable direction.

The scalping strategy tends to focus on price action​ only, and ignores all other fundamental aspects that may have an effect on an asset’s price. This is an example of technical analysis​, where scalpers study price charts with scalping indicators and other price projection tools in order to gather information on both past price data and make future predictions.

Scalping can be compared to various other methods of trading, most noticeably day trading and swing trading, due to their similarities of quick and short-term investments. However, these do not entirely follow the same processes in the world of trading strategies, so in what ways are they different?

Scalpers tend to favour a market’s volatility. High-frequency scalpers can use automated software to enter and exit hundreds of trades within a fraction of a second, with the aim of capturing rapid price fluctuations. Read more about high-frequency trading​ here.

The foreign exchange market is where a trader can find a vast majority of scalping opportunities. This is because the forex market has the highest trading volume and liquidity of all markets. This causes major currency pairs to contain tighter spreads than most markets, allowing traders to enter and exit positions quickly.

For example, the uncertainty of Brexit and the UK’s future within the European Union, along with recent general elections, had a bounding effect on the British pound. Forex scalpers​ aim to use this volatility to their advantage by closely monitoring the value of the GBP in the moments before and after a vital decision is made, ready to pray on price fluctuations.

Traders use a stock scalping strategy sparingly, as the share market​ can be very unpredictable. Although some stocks show growth potential, they might not all lead to a point of liquidity that scalpers need in order to enter and exit a trade with speed. In this situation, swing trading stocks​​ is more commonly used, as this employs a longer-term strategy, while also attempting to profit from small price movements.

Technical analysis tools are used to help an investor identify certain trends and patterns before they place their trade online. In general, the best scalping indicators overlap to work together for a successful scalping strategy. The most common trading indicators​ include Bollinger Bands, a simple moving average (SMA) as well as an exponential moving average (EMA), and stochastic indicators.

It is fairly common to use trading patterns to identify trends and price movements of an asset, which are often displayed through candlestick charts. Candlestick patterns can be seen as a leading indicator, as they show whether a trend is bullish or bearish, and there are many different types of candlestick formations. Scalpers can use these patterns to identify possible entry and exit points that will result in the highest profit.

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The topic of scalping often brings up the risk vs reward debate, as some traders are doubtful that it can be completely risk-free. This is true, as no trading strategy is guaranteed to provide profits only, and it can only pay off if the trader is strict about their exit strategies. It is important that all scalpers and arbitrage traders in general have a risk management strategy in place. Take a look at our risk and money management guide, where we provide more information about stop losses, potential slippages and using leverage in trading.

In order to follow a successful scalping trading strategy, you need to be aware of the risks and the trader is required to have an efficient exit strategy. One exit strategy could be to use a stop-loss order, whether basic or guaranteed, where a trader can place a maximum limit on how much money they are willing to bet in total. Once this figure has been succeeded, they will be automatically withdrawn from the trade so that their losses are not multiplied even further.