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The fast-paced world of day trading stands in stark contrast to the long-term buy-and-hold investment strategies of traditional markets. While some traders park their money for years at a time, day traders rapidly buy and sell assets like stocks, futures, and forex in pursuit of quick profits.
Known as “scalpers,” these traders open and close positions within minutes or hours, sometimes executing hundreds of trades in a single day. Rather than wait patiently for long-run returns, scalpers attempt to make small but consistent gains that add up through high volume. It’s an intense style demanding decisiveness, diligence, and steel nerves.
The volatile, high-risk bets of a scalper differ enormously from conventional, decades-spanning retirement investments like 401(k)’s. But for thrill-seekers with ample capital to spare, the hunter’s rush of rapid-fire trades offers financial fortune for the bold and skilled. Scalpers thrive on volatility that leaves buy-and-hold investors seasick. While their rewards can be great, so too are the risks to funds and sanity alike.
It is an intensive trading strategy that has the potential to earn the trader huge profits by combining the small profits collected throughout the day. Still, it is not a very popular choice among most traders either because of the intensity or the seemingly meager profits earned from each trade, but it can be quite profitable.
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Many traders earn huge profits from scalping, but there are still losers just like with any other trading strategy. The key is to master the basic rules of scalping which will help you make money.
1. Minimize the use of indicators
Trading indicators used by technical analysts and advisors are great for informing a trader of any opportunities that may present themselves shortly. Some of the most popular indicators include:
- Relative strength index (RSI)
- Bollinger bands
- Moving average convergence divergence (MACD)
- Moving averages – exponential and simple
- Stochastic indicator
Then there are other ‘exotic’ indicators and trading instruments that some traders swear by, although they are not so common such as:
- Ichimoku Kinko Hyo
- Fibonacci retracement
All Forex trading platforms will have these indicators and more, totaling more than 50 trading indicators. As a trader, you would want to double-check every trade before placing it, so it would be tempting to add as many indicators as you can, and then you end up with a cluttered workspace filled with indicators. Also, don't forget to check our in-depth Exness Broker Analysis.
This is never advisable, for any kind of trader, but when you’re scalping the market, this will end your trading career very quickly. As a scalper, you want to catch any minor trends or shifts in the market, which means you need to make quick decisions. Since indicators are useful, having too many of them will cause an overload of information, and before you can place a trade after interpreting every single indicator, the trend you were looking for will be gone.
While some scalpers trade without any indicators at all, this is also not advisable. Instead, you need to have 1 or 2 indicators that you have tried and tested, 3 at the maximum, and put your faith in just those. Do not second-guess yourself by adding more indicators to your workspace. You can consult the Alpari Forex Broker Detailed Review to check more about indicators.
2. Use lower stakes
Given the number of trades a scalper makes in any single day, it is paramount to lower the amount of margin dedicated to any single trade and minimize risk. The common rule is never to risk more than 2% of your initial deposit on a single trade, so a $1,000 account holder should not place any trade that is above $20 in the margin.
First, this limits the hit an account can take if the trade goes south. It also allows the trader to place multiple trades at a time without infringing on the margin requirements, even if the trading account has a small capital. By keeping low stakes, the scalper can keep trading even if they make a few losses along the way, otherwise, they would receive a margin call and that can quickly lead to the account being wiped out. We recommend you check the Forex.com Account Options and you can compare NordFX Forex Account Types.
3. Minimize losses
As a scalper, you will probably make a lot of trades in a day, and the truth is that not even the best traders in the world have a 100% success rate. The key to earning good money with scalping is to minimize your losses, on the losing trades you make.
There are several ways to do this, but the most important is never to forget to use a stop loss and keep it close to the bid/ask price. On a long position, the stop loss should be just below the previous swing low, while on a short position, it should be just above the previous swing high. The swing low is the price at which the markets bounced back up while the swing high is the opposite, check the figure below to understand this better.
Besides scalping, placing the stop loss very close to the bid/ask price is not advisable since the trend may shift after a day or two, but a scalper does not have this luxury. For a scalper, the idea is to close out a losing trade as soon as possible with minimal losses and move on to the next trade.
4. Master specific strategies
Unlike swing trading or other forms of long-term trading whereby the trader can switch up their trading strategies from one trade to the next, you shouldn’t do this when scalping. Imagine placing tens of trades in a single day without any specific strategy, that would be chaos, wouldn’t it? You would have no idea which strategy worked, and which one didn’t, and it would be impossible to tell what went wrong that made you lose money.
This is why scalping is not meant for amateur traders, but seasoned traders who have tested and mastered specific strategies that have worked out for the best. Before scalping any market, test your strategy in a demo account which is always offered by the broker, and then apply your strategy to your trading day. The most profitable scalpers will have 2 or 3 strategies that they repeat all through the day, and they enjoy significant profits as a result.
Some of these strategies could involve a mastery in:
- candlestick patterns
- use of indicators
- trading on financial news announcements
5. Select the appropriate timeframe
On all Forex charts, there is an option to select which timeframe you would prefer to trade on, which can be as small as a minute up to months or even years. This option is not useless but is provided by the Forex broker to cater to all trading styles. As we have already seen, scalpers make tens of trades every day, so the longer timeframes are of no use.
The maximum recommended timeframe for a scalper is the 1-hour chart, but you will make more use of the 1-minute, 5-minute, and 15-minute charts. The 1-hour chart, and perhaps the 4-hour and daily charts, should be used only to confirm the trends since trends from the previous day may affect the present day.
6. Keep an eye on financial announcements
If you compare the fundamental and technical analysis of the Forex market, you will quickly see that scalpers are mostly technical analysts. However, this does not mean that, as a scalper, you should disregard any data or information on the economic calendar Forex, you should be aware of any major financial news announcements.
The only difference between you and a purely fundamental analyst is that, as a scalper, you won’t have to wait for the news to break before placing your trades. The knowledge of certain financial news only guides you on which currency pairs, stocks, or futures to trade, but it doesn’t directly affect your trading day.
For example, if the Federal Reserve (FED) Chair Janet Yellen is about to announce changes to the United States’ fiscal policies, you might want to be a bit more careful with any trades involving US Dollar pairs or US stocks. Such news announcements can cause the markets to break away from the direction your trading instruments were pointing at. It might cause support and resistance levels to be crossed, perhaps, causing you to be stopped.
To be clear, I’m not saying that scalpers should avoid these financial crises caused by news announcements because they can be very profitable, but only if you are on the right side of the trend.
7. Choose your preferred market
Scalping is not limited to Forex trading alone, but this trading strategy can be used to trade stocks and futures as well. Each of these instruments will have its unique advantages and disadvantages, and you only have to choose which best suits your trading strategy.
Scalping the Forex market
Scalping is most suited to the Forex market because it is a 24-hour market and the trader can trade continuously for hours. Besides, there are plenty of currency pairs to the scalp from, and this is exactly what a scalper needs to place numerous trades simultaneously.
Scalping the futures market
The futures market has recently become a 24-hour market, and this can allow a scalper to trade throughout the day. The futures market also offers very tight spreads, which is a great advantage to any scalper.
Scalping stocks
The stock market will not offer the scalper a 24-hour trading period since the stocks can only be traded during the trading session of that company’s location. For example, Twitter stocks can only be traded between 9:30 AM and 4:00 PM Eastern Time when the NYSE is open. However, the stock market still has high liquidity, and it may suit a certain kind of scalper.
8. Control the number of simultaneous trades
The beauty of scalping is that you place numerous trades with low stakes, leaving you with plenty of free margins to place more trades. That and the goal of placing as many trades as possible can push a scalper to place many trades running simultaneously at any given time. There is nothing wrong with this, but you should try to limit the number of trades you have depending on your capital. If you have a huge capital, you can place as many trades as you want to provide your margin level percentage is still reasonable.
Another thing to remember is never to place more than 3 simultaneous trades based on one currency. For example, you should not make more than 3 trades that each have the US dollar as the base currency. If you do so, and for some reason, the US dollar performs contrary to what you had predicted, then all those trades will be losers, and that will create a huge dent in your capital. Therefore, if you’re going to place multiple simultaneous trades, make sure you have a variety of currency pairs.
9. Select markets with the lowest spreads
The spread is the difference between the bid and ask price, which is why all trades will begin with a negative return. The idea behind scalping is to make small profits, from tens or even hundreds of trades. However, it is difficult to make a profit within a short timeframe if the spread is too wide. This ECN brokers list is a good start at identifying the brokers with the tightest spreads.
The most popular markets will usually have the tightest spreads, and the most popular markets are usually US dollar crosses like the EUR/USD, USD/JPY, USD/CAD, GBP/USD, etc. Exotic pairs like the USD/NOK, USD/TRY, etc. have a much wider spread and will start your trade at a huge negative position. This wouldn’t be a problem for a long-term trader, but a scalper should avoid these exotic pairs like the plague.
Be wary of brokers who have very tight spreads but charge a commission on every trade, too. Scalping is all about making very small profits, and a commission levied on these profits can lead to losses rather than profits.
10. Get in an ideal frame of mind
A scalper is not the kind of trader who places a trade and goes on vacation or goes to the kitchen for a snack. You will need to be at your computer, staring at the Forex charts continuously for hours. During this time, you will need to be completely focused on your trading and put away any distractions. Do whatever you need to do before starting your trading day to get you focused, I prefer music, but you should do whatever makes you most attentive.
You should also prepare yourself for losses and mistakes, every trader makes mistakes and losses, so prepare yourself psychologically to take it in stride. Most of the traders who make huge losses are usually pushed by having a wrong state of mind whereby they place trades without proper consideration to try and make up the losses. Every loss is a lesson to be learned, so take the loss and take note of what you did wrong, but don’t deviate from your strategy.
Final Thoughts
Now that you know the basic rules, you should know that some brokers do not tolerate scalping, and they may even penalize you if you place more than a certain number of trades in a day. Remember to enquire about this when choosing a Forex broker, so you can know what you’re in for. Or, you can check out our list of reputable scalping Forex brokers to make your search easier.
For more Top Brokers, make sure you check out our Alfa Broker and RoboMarkets review.
To see how scalpers make money, watch this video of a scalper in action:
