When an ordinary person first hears the word scalping, in most cases he has two associations – Indians and a surgical scalpel. In fact, this is one of the terms of trading in the financial markets.
Scalping is a way of trading in the financial markets, which involves opening and closing trades in a very short period of time.
It is noteworthy that both the Indians and the surgical instrument can indeed be associated with scalping. The fact is that scalping from English is cutting off the “scalp” or “top”. The trader removes the “scalp” from the market, cuts off the upper part. Hence the direct association with the Indians. As for the scalpel, as in surgery, where the filigree accuracy of the incision is extremely important, scalping requires the highest accuracy from the trader when opening and closing trades.
scalping in trading
In many places you can hear another term – pipsing. It is often used by traders, combining scalping and pipsing into one common trading method. However, this is not entirely true. When pipsing, a trader opens a lot of transactions, both for buying and for selling, while the life of transactions is from several seconds to a minute. Profit on such transactions often does not exceed 5 points. A scalper, on the other hand, can open much fewer trades, their lifetime can be from several seconds to several minutes. Profit in this case can be 10, and 20, and even 50 points. Scalping refers to intraday trading.
In essence, the scalper holds the trade as long as it goes into profit. It fixes profit at the very top of the candle (cuts off the “scalp”) before the quotes of the instrument reverse. This is trading in local highs or lows. Agree, surgical precision. At the same time, it is necessary to calculate the entry point into the trade very accurately so that the price goes further in the predicted direction. A pipser, unlike a scalper, closes a trade even if quotes continue to move in his direction. Takes only a small part of the profit from the market.
Despite the fact that scalping is a full-fledged method of trading on the stock exchange, there are several varieties of it:
- DOM scalping. The merchant examines the contents of the glass of orders. The volume is analyzed, as well as the number of buy/sell transactions.
- Impulse scalping. Based on the study of all external factors that may have a significant impact on the value of the asset in the short term. These can be political events, economic data, natural disasters, etc.
- Hybrid scalping. This is a combination of the two varieties mentioned above. It is considered a widely applicable method and can be used for scalping in any markets.
We figured out the definitions, then we will consider in which markets scalping strategies can be successfully applied. The most important thing is that the market has high volatility. Basically, this is always present in the currency and stock markets, and in recent years, very high volatility has been present in the cryptocurrency market.
The choice of a short time frame is the key to success in scalping
If you have already decided on the market in which you will use scalping, we invite you to find out what else you need for successful trading. The broker is the link between you and the market. If you make the wrong choice, you risk getting a lot of technical problems that will completely cross out all your plans for using scalping. What is meant. This is a very low speed of processing orders, these are too large slippages of quotes or their absence at all at the time of the request, this is unscrupulous processing of pending orders and TP/SL orders.
Choosing a market for trading, as well as a broker through which to work, is not all that you need for successful trading. There are still directly trading nuances that you need to know about. One of the most important is the choice of timeframe. Considering that scalping refers to intraday trading, the periods must be chosen less than D1. Basically, experienced scalpers work on M1 and M5 timeframes, less often on M15. It is important to understand here that the lower the period, the more difficult it is to work on it. For that, it reflects the smallest fluctuations in quotes and shows a “live” reaction of the market to ongoing changes. The older the period, the smoother the quote movements become. This increases the chances of missing the moment of a successful trade entry. The optimal timeframe, in our opinion, is the M5 timeframe. This is, let’s say, the golden mean. Price fluctuations on the “five-minute” are not so active, but you will not miss a good position to enter the market. In addition, technical indicators work quite well on the M5, which we will discuss below. In general, trading on this timeframe, a trader can receive up to several accurate signals per day to open a deal.
Indicators for scalping
For those who have just started to study trading and are not yet familiar with technical analysis, we give a brief background.
Technical indicators are technical analysis tools that are used in the exchange trading process. They help to quickly analyze the market and make the right decision.
In fact, a lot of indicators have been developed to date, including various author’s versions. Only in one MT4 trading terminal there are more than 50 of them. We will consider only those that are most popular among scalpers.
- iPump indicator, the indicator allows you to analyze even the smallest price movements and helps to accurately predict the end of the movement, because. The indicator measures the average price movement of each time frame and analyzes it with past data.
- Moving Averages. It is a classic trend indicator. Helps the trader to predict the direction of the market movement, its strength. This makes it possible to determine entry and exit points for a trade.
- MACD. Combined indicator. It is a moving average and a histogram. Allows you to predict price fluctuations, check the direction and strength of the trend. A feature is the ability to determine the reversal points of quotes.
- Stochastic Oscillator. A technical indicator that displays the percentage of the closing price and its maximum performance in a certain period of time.
- RSI. This indicator determines the strength of the trend present in the market, as well as the likelihood of its change.
- CCI. An indicator that works in any market. The principle of the indicator is quite simple, CCI measures the deviation of the price of an instrument from its average price for a certain period of time.
Which indicators to use for trading is already a trader’s personal choice, but as practice shows, mostly experienced scalpers combine several indicators. The fact is that some indicators are lagging, and some are leading. In this regard, their combination significantly increases the efficiency of scalping. All the technical indicators discussed in this section can be found in the MT4 and MT5 trading platforms.
Scalping. Trading example
Let’s move from theory to practice. For example, let’s take the most difficult timeframe M1, as well as the MACD and Stochastic indicators. The trading instrument is the GBPUSD currency pair.
Deal #1. A sell deal was opened under the following conditions:
- On the Stochastic oscillator, the fast %K line crossed the signal %D from top to bottom in the GBPUSD overbought area.
- On the MACD, the histogram bars began to decrease in the positive area of the indicator.
The transaction was closed based on the following indicators:
- The %K line crossed the %D signal line upwards in the pair’s oversold zone.
- MACD histogram bars started to decrease in the negative area of the indicator.
Deal #2. A buy deal was opened under the following conditions:
- On the Stochastic oscillator, the fast %K line crossed the signal %D from bottom to top in the oversold area of the pair.
- On the MACD, the histogram bars began to decrease in the negative area of the indicator.
Profit fixation was carried out when the following signals coincided:
- The %K line crossed the %D signal line from top to bottom in the GBPUSD overbought area.
- The MACD histogram bars started to decrease in the positive area of the indicator.
What is the result? If you estimate “by eye” the total number of points from two transactions, you get 27 points. Subtract from this figure the average spread of approximately 2 points, we get 25 points of net profit. If a trader opened trades with trading volumes of 1 standard lot, then in monetary terms, earnings amounted to about 250 US dollars. It is noteworthy that no more than 50 minutes passed between transactions. Thus, trading several instruments, you can close at least a dozen profitable trades during the day.
Exchange scalping robots
In the end, I would like to touch on another interesting topic related to scalping. Probably, not every novice trader knows that trading on the exchanges today is carried out not only by living people, but also by fully automatic systems – trading robots. You heard right, in the last decade traders have really learned how to trade with the help of specialized computer programs – trading scripts. These programs are a script that is installed in the trading terminal and independently concludes trades, according to the algorithm embedded in it. Trading robots are also very popular among scalpers, opening dozens, and sometimes hundreds of trades per day instead of them.
According to the degree of human participation in the trading process, we have identified the following types of scalping:
- Manual scalping – implies that all operations on transactions are performed by a person.
- Automatic scalping – all trading operations on the account are performed by a software script installed in the terminal. The trader’s participation consists only in preliminary settings, their adjustments, if necessary, as well as updating the trading robot.
- Semi-automatic scalping is, in our opinion, the most effective type of scalping. It allows you not to waste time on the analysis of technical indicators, distracting the trader from everyday affairs only when there is a clear signal to open or close a deal. The robot itself does not perform any trading operations, this function is completely entrusted to a person, which allows you to better control the market and your trading.
As you can see, the topic of scalping on the stock exchange is quite serious. With a detailed study of it, as well as practice on a demo or cent account, in the future scalping can give you tangible and stable profits in a very short period of time.