Scalping in forex is one of the most popular trading strategies used by traders, explains Konstantin Rabin of Forextradingbonus.com.
It generally involves opening and closing trades within a 1-to-15-minute time frame. In addition to that, this type of trade has several specific characteristics. Firstly, the profit goals for scalpers is usually small, because, in such a short period of time, the market rarely makes any drastic moves, except for major economic announcements.
Consequently, the market participants using this trading strategy usually aim for 5-to-20-pip gain per trade. Here it is also worth mentioning that the majority of scalpers are not using the stop-loss and take-profit orders when opening new trades. This is because filling out those orders does require a number of seconds and they do not want to lose this time doing this, since, during this period, the market might make some notable moves.
In addition to that, it is important to remember that one of the main purposes of using stop-loss orders is to protect traders from heavy losses when they are not in front of the screen. However, as mentioned before, during the scalping strategy the maximum duration of the trade is near 15 minutes. Consequently, the market participants stay in front of the trading platform this entire time without any difficulty.
Since scalpers are trading with such a short timeframe, they tend to mostly use one-minute charts, also known as tick charts. One can see one example of such a diagram, showing the price developments with the GBP/USD currency pair:
As we can see from the above image, during the trading session of the 29th of September 2020, the GBP/USD pair was trading close to $1.2845. During subsequent minutes of trading, the pound has made notable gains, eventually rising to the $1.2865 mark. However, despite this development, it was followed by a sharp correction, with the pair dropping all the way down to $1.2835 level.
Now, despite this major setback, the pound made a steady recovery, not only erasing all of its recent losses but also eventually rising all the way up to $1.2875 level.
So, as we can see from this example, under normal circumstances, the exchange rate movements on those types of charts are rather limited. In the first case, the pair has risen by 20 pips, followed by a 30-pip decline. Finally, the pound has erased all of those recent losses and risen by 40 pips.
Consequently, the largest move we can observe from this chart is 40 pips, however here it is worth remembering that it actually took two hours for markets to complete this move. So, this is exactly why scalpers choose to target small amounts of gains, in order to make it a more realistic goal to achieve.
Advantages and Disadvantages of Using Scalping Strategy
It goes without saying that the use of scalping forex strategy does have a number of benefits. Firstly, it is helpful to point out that scalpers do not have to pay any sort of rollover fees to the brokerage company. Traders have to pay those types of daily charges when they buy a lower-yielding currency and sell higher-yielding currency, leaving the position open overnight. However, since scalpers close all of their trades in 15 minutes or less, they do not have to worry about those types of fees.
In addition to that, scalpers usually do not have any trading journals and also do not spend a great deal of time on detailed technical or fundamental analysis. This is because of practical considerations. The reality of the matter is that experienced scalpers are executing dozens of trades per day, with some of them, opening and closing as much as 50 positions. Consequently, if those market participants spend time on those activities, they will not be able to execute so many trades.
Here it is also worth mentioning that maintaining a proper risk/reward ratio with scalping is quite simple. For example, those traders who are aiming at 10-pip profit per trade, can stop their losses at 5 pips, if the market moves against them. In this case, the market participants would maintain a 1:2 risk/reward ratio. Consequently, this gives them a chance to earn some decent payouts, even if the percentage of winning trades is at 45% or even at 40%.
Despite all of the advantages of scalping, this strategy does have its own drawbacks as well. Firstly, it is worth noting that since this trading style involves opening and closing dozens of positions, it can be a very tiring and stressful experience for many traders. In fact, faced with so many trades, it is easy for some people to become overwhelmed with emotions, and as a result, make some irrational decisions.
It is also important to point out that in such a short time frame, the exchange rate movements are highly unpredictable. It is true that the market can make some unexpected moves in the long term as well. However, in those cases, traders can take a look at the relative interest and inflation rates, Gross Domestic Product, Purchasing Power Parity, and other indicators, which can have a significant impact on the exchange rates. Yet, in such short timeframes, those factors have very little influence on the market.
Obviously, traders can still look at one-minute or five-minute charts for identifying candlestick patterns, however, this can be a difficult task for many market participants. This is why some scalpers prefer using Heiken Ashi charts in order to make it easier for them to identify the latest trends in the forex market.
Finally, it is important to point out that such large numbers of transactions with scalping strategy increase the overall amount of commissions traders pay on spreads to the brokerage company. That is why it is important for scalpers to find a broker that offers trades with no fixed commissions and with tighter spreads as well.
By Konstantin Rabin of Forextradingbonus.com - an online trading portal in South Africa.
