In terms of Forex trading we imagine scalping as a process to take a small amount of profit out of the market extremely quickly, whilst risking very little of our account size, on an individual trade. Get the process of scalping right and traders liken the method to stealing candy off a baby, get it wrong and you can experience a drawdown that’ll leave you curled up in the baby’s fetus position. It’s a rapid fire method of trading and it can be a rapid fire method of failure – for the inexperienced and those who fail to follow the basic rules of extremely tight money management.
What is the definition of scalping?
There is one issue that needs to be discussed before we move on to the main body of the article; what scalping actually is and the type of scalping you can actually conduct on your retail platform. Opinions differ on the definition of scalping, some traders will suggest it takes place off a certain time frame, some will suggest it refers to the small amount of pips gained on each trade, traditionalists will regard it as a lightning quick method of trading, whereby you’re looking for gains roughly equivalent to the spread value, perhaps one to two pips at most.
Now that traditional view, especially the reference to aiming for a pip gain relevant to the spread, should immediately set off alarm bells for novice and intermediate traders as to what’s possible. If the problem isn’t obvious then we’ll spell it out; it’s close to impossible to scalp, in the traditional meaning of the concept, on a retail platform, even using your own coded algorithms through a sophisticated platform such as MetaTrader4. We will never develop a reliable and robust enough strategy to scalp off such platforms, no matter if we use VPS, located right by the exchanges on which we conduct our trades. We won’t do it if we have the fastest P.C., or Mac we can afford, or if we have a lightning quick broadband internet connection.
Huge investment banks have employed the best quants to design highly complex algorithms, using the finest analysis and most powerful computing programs and hardware, trading off bespoke platforms to scalp the markets. They conduct these high frequency trading operations, in such lightning quick speeds, that it becomes as close to front running (getting in front of the market), as imaginable. While we, mere mortal retail traders can’t possibly scalp in that manner, or compete in that arena.
However, don’t let that claim and contention put you off, you can engage in highly efficient forms of scalping in the forex market and ultimately perfect the method, whether you’re automated, or you’re using manual techniques. For many amongst us, who have a natural aversion to holding trades overnight, or over a longer-term period, a form of scalping offers an excellent, hybrid method, to trade the markets.
Our versions of scalping may be aiming for a certain amount of pips, or to bank gains between various support, and resistance levels. It may involve price reverting to a mean, after a peak has been reached shortly after a high impact news event has been released. It may involve placing orders into the market, in an attempt to profit from certain news releases. The important issue is to recognize the limits of your P.C., your platform, the STP/ECN market your placing your orders into and the speed of your internet connection. If you’re realistic in your ambitions for your version of scalping, it can prove to be an excellent and potentially highly proficient strategy.
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