What is Scalping in Trading?
Are you new to the trading industry? Wondering how to trade safely with your precious investment? Then scalping is your way to go. This article intends to demystify some of these concepts so that, as a new trader, you can make up your mind on how you go about trading and how you can make quick revenues using scalping. Let’s discuss what it is and how it works.
Definition of Scalping:
Scalping is a technique with a short trading period. It focuses on making profits from small price changes. Scalpers make small profits by quickly entering and exiting the market to skim small profits from high-volume trades. They place numerous trades throughout the day to make small profits.
For scalp trading, you need to have a quick exit policy because one large loss can negate many small profits you have made earlier in other deals. Scalping hence needs discipline, patience and the ability to quickly and correctly act on market trends.
Before giving it a try for scalp trading, you need to know how it works.
How does scalping work?
Scalping involves buying and selling in multiple small trades to earn profit from price differences. The cue is to find highly liquid assets that ensure frequent price changes during the day. You can only scalp when the assets have a good liquidity rate; it enables you to get a profit when entering or exiting the market. But as you have to pay the spread, the profit is usually low. Scalpers believe it is less risky and easier to make small deals than to make big ones.
Scalping can not only be done manually. It can be automated too. In Software like MetaTrader 4(MT4) and MetaTrader5 (MT5), traders can enter an automatic point to gain profit. To get good profit and to make their scalping strategy successful, scalpers depend on various factors, including scalping indicators, live feed and direct access brokers.
Indicators for scalping.
As mentioned earlier, Scalpers rely on technical indicators to open or close a trading position. They need to keep track of every small movement to get maximum profit.
Here are some indicators you should consider while doing scalp trading:
1- Moving average indicator:
It is one of the simple and most widely used indicators. While doing scalp trading, you need to decide on a time frame for trading and then put several moving average combination lines. Scalpers use this indicator to pinpoint a trend and a chance in the market to open a trading position.
2- Stochastic indicator:
It works slightly differently than other indicators. It is used to determine potential trend reversals. Mostly it is advised to be used in combination with other indicators incorporated in one system, like moving average indicator or Bollinger bands. When the Stochastic line goes above the oversold level or below the overbought level, it leads to the best ribbon trade.
Similarly, after a profitable attempt, you need to exit promptly when the indicator crosses and rolls against your position.
3- Bollinger Bands:
This indicator has a low time frame. It helps find whether prices are high or low relatively. Upper and lower bands of this indicator work combining with moving averages. The Bollinger band pair is used when the signals are given by other indicators.
Pros and Cons of Scalping in Trading:
Traders can make money by scalping without the need to know about the further details of an asset. It can be very profitable if the trader knows exactly when to exit a trade. If you have a good concentration span, scalping is the right thing for you.
Scalping has its disadvantages. This technique requires a lot of focus which means it is more likely that traders will miss other chances to trade in assets that generate more profit. Scalping requires hours of sitting on a computer which can put a toll on the trader’s health.