This is one of the most common trading methods that many traders learn about at the beginning of their journey. Scalping allows a trader to speculate based on the small changes in an asset’s price. It is widely used by day traders, who open anywhere from 10 to hundreds of short deals, generating the outcomes of numerous deals. Let’s have a closer look at how it can be used.
How does it work?
The system of a scalping analysis is very straightforward. Normally, scalping is performed intraday, which means that all the deals are opened and closed within one trading session (before the market closes). Scalpers’ goal is to acquire a positive outcome over multiple short deals with small returns and manage the risks involved.
Consequently, the length of the deals is also quite short. Depending on the market and the trader’s approach, a deal can last from several seconds or minutes to several hours. Scalpers may quickly close deals in order to move on to the next one and acquire results from a sequence of small trades.
What tools to apply?
Since this analysis is all about making short-term deals, the convenient chart types to use may be bars and candles. This allows the use of candles and bars of short intervals (one-minute, five-minute ones and so on).
Traders may also use technical analysis in order to improve their understanding of where the market is currently heading. For short-term trading such indicators as Moving Averages, RSI, Parabolic SAR and Stochastic Oscillator may be used. These indicators may show potential entry points and identify the trend direction over a certain time period.
Pros and cons
Scalping has its advantages and disadvantages and each trader may decide if this approach works for them.
The pros of this analysis are evident. It provides traders with the opportunity to open and close deals within the same day, without having to wait for their investments for a long time. Though the understanding of the market is very important for any type of strategy, Scalping itself does not require any complicated calculations.
The cons of the Scalping approach are associated with the high risk of the strategy. Scalping requires the use of leverage in order to maximize the potential outcome and leverage increases the risk of losses in case the market goes against the trader.
Besides, Scalping requires great self-control from the trader. A scalper has to be disciplined and make sure to stick to the trading schedule that they have planned for themselves. At the same time, scalpers need to make fast decisions when it comes to closing deals. They have to be able to act quickly in case the deal goes the wrong way not to go into a deeper loss.
Every trader needs to understand that there is no strategy that works perfectly well every time. It is important to combine any approach with a strong risk management plan since there is never 100% guarantee that false information could not be presented from time to time.