In today’s article we will analyze one of the most interesting trading methods – scalping. Surely, many of you have heard about it and know that it is a very profitable trading method, but at the same time quite stressful and nervous. Let’s take a look at what scalping is using one simple strategy as an example.
What is scalping?
Scalping is a trading method that allows you to get high returns in a short period of time. A good condition for effective scalping trading is the presence of small market fluctuations or flat. Let’s look at different trading situations in the figure below and try to understand which of them are convenient for scalping entry?
On some of its sluggish movement, a “buy” impulse appears. Then the price goes to a correction in a flat corridor, where it tries to get out of it with a false breakout and fix the trend of the last impulse. Further, we see a manifestation of the strength of the “bears”, when the price, having returned to the correction zone, breaks through its lower border and rapidly goes down.
In which position do you think a scalper can enter the market? The answer is simple – each of them is suitable for him to enter. The only question is which trading strategy he will choose in each individual case. For example:
- In position 1 (on an impulse) the scalper can close, fixing 5-10 points of profit or, acting intuitively, fix a higher profit.
- In position 2 (in a flat) the scalper will trade “according to the classic”, relying on the levels of the flat corridor.
- Position 3 with its false breakout will also give him the opportunity to earn 3-5 pips of profit.
- Within the corridor of the correction in position 4, it will also earn about 10 pips on the price decline. Breaking through its lower channel boundary opens up an opportunity for him to “jump off” the scalping and apply another trading strategy based on price breakouts.
This is a normal “alignment” if you prefer to work according to the situation using different trading strategies. In the case of scalping, a trader can also open in all these positions, but his deal must be short-term, and the exit from it – upon reaching 3-5 or 5-10 points of profit.
Scalping is more suitable for markets with good to moderate price movement. With proper scalping, the effectiveness of this trading method is directly proportional to the number of trades performed. An important role is played by the choice of the scalping method itself, as well as tools that help the trader to predict price behavior, to find entry points to open profitable positions.
So, for example, you can use the Sniper TS as a scalping strategy. It allows you to trade by levels, excluding the use of any indicators, and monthly brings more than 57% of the profit to the deposit:
The advantages of scalping trading include:
- High profitability – the ability to regularly receive high profits.
- Timing (trading session) for optimal profitable and convenient trading;
- Short-term trading operations that do not require long-term monitoring of the market situation and market analysis to maintain open positions.
- Minimum drawdown in case of unsuccessful market entry.
The disadvantages of scalping are:
- An increased degree of risk when placing stops, when, when entering with a large volume, the stop value exceeds the profit value.
- The impossibility of making high profits with a small deposit, scalping and opening positions of small volume.
- Restriction on the choice of a currency instrument. It is necessary to work only with liquid currency pairs, to choose the smallest spread for them. The use of any cross-rates is generally excluded.
Let’s consider further an example of a simple scalping strategy that we managed to find on one of the Western forums.
Simple scalping strategy
It is important for beginners to understand that in scalping one indicator is “not a warrior”. When scalping, at least, you should use at least two indicators. They should not duplicate each other’s signals, but confirm them. The strategy I am considering uses two such indicators:
- Prof scalp m1 – on the chart, the instrument looks like a moving average, painted in two colors – green and red. Accordingly, when the curve is colored green, we are looking for points to enter with a buy, when it is red, it is a signal to enter with a sell.
- Scalpster_V1 – This instrument can be classified as a histogram oscillator. It is located in a separate window. Its histogram lines are also colored in two colors – green and yellow:
- The green histogram is directed upwards – we are considering the possibility of opening buy deals. When the green lines of the histogram are drawn down, we are looking for the entry points for selling.
- Drawing the yellow lines of the histogram in a specific direction foreshadows the likelihood of a trend change. We do not open deals at this time.
You will not find them in standard MT4 tools; you can download them at the end of the article . Installing them in the terminal window is carried out in one of the ways convenient for you, for example, through the “Navigator”.
So, we are working on the EUR / USD currency instrument with the M5 timeframe .
Let’s analyze the buy signal right away. To do this, you need to:
- the Prof scalp m1 indicator curve turns green;
- the Scalpster_V1 indicator also drew us a green line directed upwards.
We set Stop Loss for the previous bottom, and did not set Take Profit. We fix the deal manually when the minimum profit is obtained or when the color of the Prof scalp m1 indicator curve changes . However, in the latter case, it can hardly be called scalping. Most likely, this is already a combined trading style, when a trader closes positions based on indicator signals.
According to this strategy, signals to enter with a sell are similar to the previous ones, but mirror-opposite to them:
- the curve of the Prof scalp m1 indicator turns red;
- Scalpster_V1 indicator also drew us a green line directed downward.
Signals from two indicators allowing you to enter the market with a sell. Stop Loss here can be placed behind the previous peak. We also do not set Take Profit, assuming the trade is closed after receiving the minimum profit. With a good price movement in our direction, the deal can be closed if the curve of the Prof scalp m1 indicator changes color.
This strategy was tested in two directions:
- Without Stop Loss and transition to Breakeven, when positions were closed when receiving the slightest profit.
- With Stop Loss setting and Breakeven fixation.
It would be fair to warn you that the greater result of the trade was achieved in the first case. In the second case, there are more chances to remain at a loss, since sharp price fluctuations did not allow us to go to breakeven and often knocked out in the footsteps.
We learned what “scalping” is, examined its general concepts and trading rules, which are reduced to one only important postulate – “there is a minimum of profit – we fix it”. This approach involves making a large number of transactions during the day.