Pros and Cons of Scalping Strategy in Forex

Posted on

Scalping is a forex trading strategy that relies on technical analysis. Known as one of the methods that can provide quick profits, it is not surprising that many traders want to learn more about this strategy.

Forex traders who use this strategy will try to “pick up” small but successive profits, which traders are often referred to as scalpers.

Usually, this scalping strategy is used to plan the best entry and exit techniques, so that traders can maximize profit potential and limit losses according to risk management settings.

Scalping, which is also one of the most popular forex trading strategies among Indonesian traders, is capable of producing a very high trading frequency of between tens to hundreds of times a day — although the average profit per position is relatively small, around 5 – 15 pips.

In general, in some strategies other than scalping, most forex traders will leave their positions open for quite a long period of time — from a few hours to several days, weeks, or even more than that, the goal is for them to get big profits. , between 20 to 1000 pips.

While in scalping trading, you will not find this because scalpers will usually take small profits that they can get in just a matter of minutes, and this is done in a row until they reach the desired daily profit target.

Well, to compensate for the low average profit per position, scalpers will enlarge the lots used to increase their trading frequency.

Therefore, a scalper can open and close trading positions between tens to hundreds of times a day. That is why most scalpers tend to make many transactions in a day.

Therefore, the observation of the overall market conditions is very limited, and the risks arising from market price movements are reduced.

Advantages of scalping strategiesy

Then, what are the other advantages of this scalping strategy for your trading?

With scalping, you can make profits faster

The first advantage of this scalping technique is that you can get maximum trading results in a relatively short time span because these scalpers will enter and exit the market in just a matter of minutes.

That is, users of scalping strategies do not have to wait for hours or even days just to profit from forex. It is enough to trade on small time frames such as M1, M5, and M15, a scalper can already get results.

You won’t have to worry about the position floating

Another advantage that you can get from a scalping strategy is that you don’t have to worry or hesitate because you think about floating positions.

For some traders, this floating position is something that may be quite annoying and often makes us anxious, especially if we do not understand the market conditions and where the price will move.

Because when the position taken is floating, we only have two choices between being left alone with full of anxiety, or doing a cut-loss.

Meanwhile, scalpers rarely let their transactions oscillate because they are carried away by floating when market movements are no longer as expected.

No wonder if at that time a scalper would exit the market by doing a cut-loss because the strategy they use is not to predict market price movements in the long term.

Be bolder to trade

A scalper is able and dares to enter the forex market even with small capital. Not a few of the scalpers who only have a capital of $ 1000 are able to make a good profit.

Disadvantages of scalping strategy

Although this scalping strategy has various advantages, there are always drawbacks — and this you should know before you decide to use a scalping strategy in your trading. Here are some of them:

Must be ready to lose

Whatever strategy you will use in trading, of course, there will always be losses. But the point of being ready to lose here is because a scalper cannot linger in the market when the analysis does not match the price movements that occurred at that time.

So here there are not a few scalpers who have to get out and are ready to be harmed. In contrast to other techniques that still have the possibility of profit by letting it float first.

Inappropriate use of lots

Usually, a scalper rarely pays attention to capital management problems to divide his lot in transactions. Of course, this will be very risky to the resilience of the capital owned because it becomes unbalanced.

However, this is done because scalpers will not rely on the resilience of their capital but they will rely on really precise momentum in a very short time.

Scalping isn’t for everyone

Why is that? Because to be a scalper, it takes a strong mentality, and must really be able to control yourself. A scalper is required to be fast-paced in taking steps.

In addition, becoming a scalper also requires sufficient trading experience and knowledge, and no less important is to have good trading psychology.

So keep in mind, not all traders can use scalping strategies in forex trading because they will be required to always make transactions at “high speed”, so high concentration is absolutely necessary.

In addition, it requires a fast and stable internet connection, to make it possible to execute transactions in seconds.

You will not be able to use this strategy if you feel you don’t have enough time or can’t concentrate fully on the chart you have.

Including, if you are not physically or psychologically fit because of course it will affect the emotional psychological condition to avenge previous losses (revenge trading).

So, make sure when you want to use this strategy, you meet the criteria and understand the advantages and disadvantages of this scalping strategy.

When is the best time to trade scalping?

Not all scalpers like market conditions with clear and strong movement directions and have high volatility because some of them like choppy market conditions and without clear directions or random.

Although both styles are equally profitable, the time period for each of these market conditions is of course different.

Then, when is the time often used by scalpers when using this scalping technique?

End of the European session

European markets were choppy as traders prepared to enter the New York market at 8:00 a.m. EST. Although at that time the London and Frankfurt markets were open, the liquidity was much reduced as trading volume began to shrink.

The release of important European economic data is over at this time, and traders are opting out of the market while preparing further strategies for the US session. Scalpers who like choppy conditions will usually enter the market during this time period.

With choppy market conditions and tend to be quiet, scalpers can apply trading strategies by taking advantage of two-way fluctuations that tend to be stable.

The results provided are quite effective and consistent as long as there is no breaking news or unexpected events that can affect price movements in the forex market.

Approaching the release of important fundamental news from the United States or Canada (usually at 8:30 a.m. EST), the market is able to move with high volatility in anticipation of the news to be released (pre-news release).

Generally, scalpers will always understand the pattern of price movements (price patterns) which usually form a triangle pattern (triangle), and will trade by opening positions in the price range within the triangle.

Based on the nature of the triangle pattern, the price will break strongly on the news release.

Session overlap

This time has a fairly high risk for novice scalpers who are inexperienced. During these hours, the New York, London, and Frankfurt markets are active simultaneously and some important economic data is usually released during this time period.

In this time period, the market is very liquid and volatile so you will need a proven scalping strategy in order to play in tune with market price fluctuations.

At low time-frames (5 minutes or 1 minute), the trend will change quickly and sharply (micro trends). To be able to anticipate changes quickly and accurately, scalpers of course need to master detailed technical analysis with high application capabilities.

Experienced scalpers will usually choose to trade during this time period. In addition to having many opportunities to open positions, the profit generated is also quite adequate.

Twilight hours

This period is usually divided into 2 parts, namely between 3:00 to 5:00 pm EST when most banks in the United States are still open, and between 5:00 to 7:00 pm EST or trading times that quietest.

Scalpers will take advantage of market price fluctuations that are directionless with a small range.

At these hours it is suitable to implement trading robots or EAs in addition to manual trading to provide relatively fast trading results with low risk.

How does this scalping strategy work?

With the aim of making small but frequent profits, there are many techniques that can be applied to maximize scalping strategies including the most common trading rules contained in the following scalping strategies:

  • Time Frame: In this type of small time frame between 1 minute to 15 minutes.
  • Profit target: Between 5-10 pips
  • Type of analysis: Prioritizing technical analysis, because according to scalpers, the effect of fundamentals is almost not visible proportionally.
  • Trading conditions: Low spreads and tight and accurate price movements

One of the scalping strategies that are quite popular among traders is the 1 minute (M1) scalping strategy. This strategy is a popular scalping strategy and is relatively suitable for use among traders, especially beginners.

However, this does not mean that this method does not require high discipline and concentration because basically, this scalping strategy will require you to devote a certain amount of time to trading — at least a few hours a day without any distractions or distractions.

Doing dozens of transactions in one day is a common thing in scalping. Therefore, it is not surprising that in this method you will need a broker with low spreads and commissions.

1-minute scalping

  • Can be used for all currency pairs that have small spreads
  • Time-frame: M1 (1-Minute)
  • Indicator: Stochastic (5,3,3) and Exponential Moving Average (EMA) period 50 and 100

In addition, there are some basic rules that you must understand when using the 1-minute scalping strategy whether you want to open or close a position.

Buy Rules

  • The 50 EMA must be above the 100 EMA
  • Wait for correction to the EMA area
  • Wait for the confirmation of the buy signal from the stochastic
  • SL can be placed around 20-30 pips below the nearest swing low level
  • TP can be placed around 80-120 pips from the entry-level

Sell Rules

  • The 50 EMA must be below the 100 EMA
  • Wait for correction to the EMA area
  • Wait for the confirmation of the sell signal from the stochastic
  • SL can be placed around 20-30 pips above the nearest swing high level
  • TP can be placed around 80-120 pips from the entry-level

Scalping 5-minutes

Not only a 1-minute scalping strategy, but you also use a 5-minute scalping strategy which is often known as a simple strategy with a 5-minute time-frame (M5).

In this strategy, you can trade in pairs such as GBP/USD and EUR/USD. The following indicators are needed for the 5-minutes scalping strategy:

  • Exponential Moving Average (EMA) – Period 10
  • Exponential Moving Average (EMA) – Period 21
  • Exponential Moving Average (EMA) – Period 50

The EMA 50 indicator has a function as a guide to see which trend is currently strong. While the EMA 10 and EMA 21 indicators function as lines that form support and resistance.

You can use the two EMAs as levels to look for entry signals.

The time that is suitable for trading with this system is when the London market session is open and also when the New York market session is open.

Because in these market sessions the GBP/USD and EUR/USD pairs usually form a trend where you should not trade during the Asian market because there will be many false signals that will be formed.

Before opening an entry position, this 5-minute scalping technique only takes or looks for 5-10 pips targets where this 5-minute scalping technique is very simple.

You only need to monitor the lines on both EMAs, while the 50 EMA is a trend direction. When the trend is up or in an uptrend, the market will form a zigzag high-low.

How, have you started to have an idea regarding this scalping strategy?

Successful traders use scalping strategies

Paul Rotter became one of the legends known for his love of scalping the German bond market. Once awarded the title of the most successful scalper trader in the world, the figure nicknamed The Most Successful Scalper trades between 100,000-200,000 contracts to 1 million contracts a day.

Not surprisingly, although the focus is not on forex, Paul’s expertise is able to attract the attention of forex traders, especially among lovers of scalping techniques. So, what are the secrets of Paul Rotter’s success?

In every trade, Paul always applies the principle of money management with the aim of targeting profits and limiting existing losses.

In addition, his ability to act aggressively such as changing positions in a fast time to gain positive momentum made Paul finally succeed in making profits in every trade.

Even his courage in doing this trade makes him a legend scalping trader. His success in applying the scalping trading style has made him one of the successful traders who are still known today.

Not only Paul Rotter, but Edwin Shin is also one of the other successful traders from South Korea. Shin became one of the young traders who learned trading while still in school on a self-taught.

When Shin started trading with real accounts he had experienced losses. However, from his losses and mistakes, Shin began to learn to be more careful in trading. He is always aware of what is happening in the market and will try to find opportunities to take the opportunities that arise.

Shin’s early career in the trading world also started with a scalping strategy. To learn this strategy, it took Shin quite a long time until finally, he was able to master this strategy and managed to make a profit of $ 1000 dollars in a day.

In fact, he set a record as a young trader who was 27 years old as a successful trader with a scalping strategy.

Amazing isn’t it?

Well, from the success story of Paul and Shin above, we can take important lessons that we can implement in trading, especially if you want to apply a scalping strategy. Here are the tips:

Trading tips with scalping strategy

If you are one of the brave traders who want to try a scalping strategy in forex trading, it is better to choose a major currency pair that has high liquidity and trading activity.

In addition, you can run your strategy by choosing the times when there is “overlapping” such as when the Asian, European, and London markets are always equally active.

You can try one of the simple scalping techniques that you think is the most promising. Whatever your choice later, be it 1-minutes or 5-minutes scalping, you can apply the following six tips when using a scalping strategy:

  • Try it on a demo account. Test the scalping strategy on a demo account before you decide to use a real account that uses real capital. You can easily get a demo trading account here.
  • Minimize risk. Never risk more than your traded amount in one position.
  • Don’t add too many indicators. Follow the rules of the existing strategy. If the trading system that is made only relies on 2 indicators, it is not recommended that you add more technical indicators.
  • Master a scalping technique that you feel is suitable to use. Applying too many strategies at one time will make the concentration more easily split.
  • Control the number of trading positions. Scalping does have the meaning of “many open positions equals many profit opportunities”. However, this does not mean that traders can freely open an unlimited number of positions. Always take into account the resilience of the funds you have when determining the number of positions you can open. Do not let the number of trades owned exceed the capital capacity and risk tolerance.
  • Always Focus. Scalping is an aggressive strategy that requires high concentration. For this reason, it is important to avoid things that can distract you when implementing a scalping strategy.

Leave a Reply

Your email address will not be published. Required fields are marked *