What is Scalping?
Scalping is the art of going in and out of the market as quickly as possible, exploiting the price gaps created by the respective pricing and spreads.
Typically ‘scalpers’ aim to profit from small price movements and attempt to hold their positions for a very short period, decreasing the associated risk with having an opened position.
Scalpers are known to trade manually, but also, now increasingly using automated strategies. The reason for this is that an automated strategy is more likely to spot the beneficial scalping opportunities at high speeds more reliably than most human traders.
What to Consider When Scalping?
It is advisable for scalpers to trade with a broker that operates a No Dealing Desk (NDD) or Straight Through Processing (STP) execution model.
The reason for this is that brokers who operate a ‘Dealing Desk’ execution model tend to find scalpers toxic. Therefore, it is known that scalpers find it more difficult to execute trades at their desired entry price, as opposed to if they were to trade with a NDD broker.
A scalper should really only trade the most liquid currency pairs, which usually are major currency pairs; EUR:USD, USD:JPY, GBP:USD, USD:CHF.
The reason for this is because currency pairs that are less liquid tend to be accompanied with a wider spread, something that increases the difficultly exponentially for a scalper to profit.
Using the correct time frame on a chart
Scalping involves trades that are opened for a very short period of time. Therefore, it is advised that a scalper should use the same short time frame when technically analysing the market.
Many scalpers tend to analyse tick charts (the smallest time frame that a chart can be shown in) up to 5 minute charts, any longer time frames charts are largely irrelevant for a scalping strategy.
Using the correct order types
In order to limit ‘slippage’ (the difference in price between where a trader wanted to enter the market Vs where a trader actually entered the market) it is advised for a scalper to use limit entry orders.
By using limit entry orders and other orders types, the potential for slippage and risk in general is limited.
- Scalping is the art of going in and out of the market as quickly as possible exploiting the price gaps created by the respective pricing and spreads.
- Scalpers need to consider; broker execution, liquidity, using the correct time frame on a chart and using the correct order types.