Broadly, there are 3 main types of participants in the financial markets. Investors buy and hold securities for months and years. Before they invest, therefore, they spend countless hours analysing the security and identifying potential scenarios. Swing traders, on the other hand, are more short-term oriented. Their strategy involves buying or shorting securities for a few days. Scalpers, on the other hand, buy or sell securities and hold them for a very short duration, which ranges from seconds to minutes.
It is possible to be successful by following each of these methods. A look around the financial industry shows people who have succeeded by using each of these strategies. Carl Icahn, Ray Dalio, and Warren Buffet are best known for holding companies for decades while others like James Simmons and Ken Griffin are known for holding securities for a short period.
The scalping strategy is different from other types of trading. In investing and swing trading, participants take time to understand the economic data and the valuations of companies. For them to succeed, their decision to buy or sell must always be right. Whereas with scalping, taking on some losses is acceptable, as they are spread out across a large number of trades.
There are a few benefits of using scalping as a trading method:
Scalpers are not interested in making huge profits per trade.
They can change their minds easily when their trades move in the opposite direction.
In-depth analysis is not necessary.
They live a day at a time and are not focused on longer-term trends.
Foundation of the scalping strategy
The main foundation of this strategy is that securities never move in a straight line. Even when there is a strong trend, securities will often make small short-term movements against the trend. For example, in 2017, the EUR/USD pair rose by 15%. Traders who bought the pair in January realised good gains. However, during the year, there were many days when the pair had significant declines. Therefore, in this strategy, these traders made money by identifying the pullback periods.
The main foundation of this strategy is that securities never move in a straight line.
Another idea behind the strategy is on the difficulties of forecasting what will happen within a certain period. In a given day, it is possible to predict how a security will move. However, because of the dynamism of the market, it is impossible to predict accurately what will happen over a longer time period. For example, for stocks traders, it is impossible to predict when a CEO of a company will resign or die. For crude oil traders, it is difficult to predict when a pipeline will burst.
How to use the strategy
The first step is to learn and understand the different types of securities and how the market works. For an ordinary trader, the most recommended asset classes are currencies, commodities, stocks and indices. Experienced and sophisticated traders can trade other securities like bonds, options, and interest rates derivatives.
To understand how the market works, a trader should read books, watch online videos, and use a demo account to create a strategy. There are hundreds of books that you can either buy online or download for free. Brokers like OctaFX provide educational materials that traders can use to learn about the market.
Once the trader is confident in their knowledge, they should select a group of securities that they will focus on. Brokers provide hundreds of currency pairs, tens of commodities, and thousands of stocks that traders can focus on. It is recommended that a trader chooses a small group of securities to become familiar with. By doing this, they will be in a good position to understand the trends of the security and when to enter and exit a trade.
Finally, a trader should come up with a method of initiating and exiting trades. In this, a trader should do the following:
Select an ideal timeframe
In this method, it is recommended that traders use very short timeframes. The ideal timeframe should range from one minute to 15 minutes.
Select indicators to use
In this trading approach, technical indicators are essential in helping a trader find the places to initiate and enter a trade. Without indicators, it is almost impossible to succeed in this method. Ideally, trend, oscillators and volume indicators should be used. Trend indicators like Bollinger Bands and Moving Averages should be used to identify a trend, while oscillators and volume indicators should be used to confirm a trend.
In addition to these indicators, a trader can identify various chart patterns. Common patterns used in analysing the markets are Elliot Wave, triangle patterns, Cypher patterns, head and shoulder patterns, and cup and handle patterns among others.
Read the news
Deep fundamental analysis is not necessary when using this approach. Instead, you should focus on the news of the day and interpret it quickly. For example, when the Office of National Statistics (ONS) releases the jobs numbers in the UK, you should interpret the numbers quickly, initiate a trade, and exit before the rest of the market does so.
It is also important to use tools that help you find news before the rest of the market. Social media platforms like Twitter and local news should be followed closely. For example, in 2014, it was reported that some traders were able to access SEC data before the markets by legally using the vulnerabilities of the SEC website.
Use tools to identify key support and resistance levels
After doing this analysis, traders should now identify key entry and exit levels. Three of the most common tools for this are the Fibonacci Retracement levels, the Pitchfork, and the Gann method. These tools can help you identify areas to initiate a buy or sell trade and where to exit.
This approach to trading is popular with novice and experienced traders. It does come with a few risks though. First, opening many traders per day can expose a trader to more costs. These costs are often small but they add up in the long term. Second, opening more trades exposes a trader to more risks especially when proper risk management methods are not used. Third, since traders benefit from slight movements, slippage costs can increase in the long term and finally, a scalping trader needs to always remain in front of the computer to spot opportunities.
If you are afraid of holding positions for long, this strategy may be ideal for you. To become good at it, it is important for you to learn, practice, and find a good broker offering low costs. OctaFX might be the best options if you are looking for the lowest spreads in the industry - only 0.4 pips vs. the average 2.5 pips. Another pleasant moment is that traders there don't pay commissions on deposits and withdrawals keeping in mind only their trading strategy.