What is Scalping? Complete guide between Methods and Risks

What is scalping? And how does it work?
The scalping technique represents a topic of great interest to all traders who want to make profits on the financial markets.

The scalper is a type of trader who performs a large number of operations per day, with a reference time horizon of a few minutes or even seconds. Making a large number of operations that last small intervals of time: here, in short, what is scalping.

This short guide, in collaboration with the experts of XTB, summarizes everything you need to know on this trading technique: from what scalping is to how it works, practical examples, advantages and disadvantages.

What is scalping?

Scalping is a fast trading procedure which aims to make profits from small price changes on a financial market. This technique is based on opening and closing positions quickly in a small period of time, often only a few minutes or even seconds. Scalping is a very popular technique among traders looking to exploit the volatility of the market for small but frequent profits.

Forex presents itself as an ideal terrain for the scalping technique, being a market open 24 hours a day, rich in liquidity and offering the possibility of operating with low spreads, which are essential for increasing profit prospects.

How does scalping work?

Scalping is all about the ability to quickly identify trading opportunities and execute trades quickly. Scalpers try to take advantage of market volatility to make small but frequent profits by taking advantage of fluctuating prices.

To perform scalping, scalpers use technical analysis tools such as charts, indicators and financial news to try and identify trading opportunities. Once they have identified an opportunity, scalpers quickly open a position and close it as soon as they have made a profit. This process is repeated many times a day, with the aim of making profits from small price changes.

Choosing the financial intermediary to rely on, both for your training and investments, is extremely important: choosing a regulated and globally recognized broker such as XTB allows you to access complete and free training, in addition to benefiting from greater security than other institutions, as your funds are segregated from those of the company, which is regulated by the most important financial regulatory institutions.

History of scalping

There is no single precise origin for scalping, but it can be said to have evolved as a consequence of the opportunities offered by technology and the volatility of the financial markets. Traders started trying to exploit small price changes to make profits on the stock markets and from this goal the scalping technique materialized. With the advent of online trading, scalping has also become increasingly popular in other markets, such as forex, commodities and cryptocurrencies.

Who scalping is suitable for

Scalping is a technique that is mostly used by traders who trade with a large amount of capital and who are willing to take more risk than traders using more traditional techniques. This type of trader is generally very experienced and fast in analyzing the market and executing trades.

Furthermore, scalping is also used by traders who do not have much time to spend trading but still looking to make profits. These traders can use scalping as a way to make quick profits without having to spend a lot of time monitoring the financial markets.

Forex scalping: the best currencies

Forex is the most liquid market in the world. The presence of a large number of traders and transactions is the basis of its being the ideal terrain for scalping.

The best currency pairs for scalping are those with the largest transaction volume, which therefore have the lowest spread. Specifically they are:

• euro-dollar (EUR/USD)
• dollar-yen (USD/JPY)
• euro-yen (EUR/JPY)
• sterling-dollar (GBP/USD)

Especially during the course of our "financial" day, from 9:00 to 18:00, these are the four currency pairs that have the lowest spreads, i.e. the highest profit margins for the large number of trades that need to be to execute.

Which timeframe is best for scalping?

The ideal timeframes for scalping are those that take the smaller time intervals as a reference. In particular:

• the 1 minute chart (M1)
• the 5-minute chart (M5)
• the 15-minute chart (M15)

The choice between these timeframes remains very personal and depends on the average duration of the operations to be carried out and on one’s aversion to risk, in fact the M1 and M5 are more unstable and therefore signal alert situations more frequently.

In general, M5 is the most used timeframe, precisely because it balances the strengths and weaknesses of the other two.

Scalping means following the trend

Once you have chosen the currency pair and timeframe to use, you need to understand the sentiment of the market.

Scalping means taking the main movement of the day or the active trend and making many small profitable operations that follow the progress of the macro trend. In fact, exposing yourself to a counter-trend with a large number of positions is never advisable.

It will therefore be necessary to identify the day’s trend, look at the major timeframes and other technical indicators to understand the main movement held by the exchange rate and then follow it.

Using multiple indicators to scalp

In order to prevent a reversal of the main trend from compromising the effectiveness of scalping, it is necessary to integrate operations with other indicators, which keep the situation under control and report any trend reversals.

The same scalping techniques, of which we will now see three practical examples, can be integrated with each other, allowing scalping on Forex with the simultaneous use of multiple indicators, to offer greater consistency and improve results.

Practical scalping examples

Three of the most popular indicators among scalping techniques are the moving average, the Bollinger bands and the stochastic indicator.

The following graph shows the M5 of GBP/USD with the 20-period moving average:

The main trend is bearish and the red arrows indicate sell entry positions, i.e. when the price level returns below the moving average after having exceeded it (the opposite would have happened in a buy during an uptrend).

Below are the 15-period Bollinger bands for the EUR/USD exchange rate, 5-minute timeframe:

Also in this case the trend is bearish and the sell entries are indicated by the red arrows, i.e. in the moments in which the price retraces towards the high Bollinger band (the reference point would have been the low band and the buy operation if the trend was up).

As a final example we use the stochastic oscillator on the USD/JPY M5:

The points in which to operate the sell, given the downtrend, correspond to the moments in which the stochastic index has invaded the high area of its range, or the overbought (the opposite in the case of a downtrend).

Scalping and money management

Scalping trades can be wrong and loss management needs to be considered.

The large number of trades made by a scalper are born with a minimum profit horizon. At the same time it will therefore be necessary to have a stop loss that does not affect the success of subsequent operations.

Scalping means entering and making a profit in the shortest possible time, and then closing the position.
For this reason take profit and stop loss must remain close to the price, having as reference levels of the indicator used (moving average, Bollinger or stochastic) which represent the limit beyond which to accept the loss or realize the gain.

It will be important not to fall victim to emotion and establish, even better with the experience of a trading period with a demo account, the amount of pips at which to place take profit and stop loss, according to one’s preferences and in compliance with the self-discipline.

Benefits of scalping

Scalping involves opening and closing many positions in a short period of time. Such a high frequency of trades allows scalpers to make potential profits quickly and frequently.
This speed means that scalpers do not have to incur the fees of holding a position open for a long time. Furthermore, the time exposure to risk is limited, which means that scalpers can avoid being hit by significant long-term losses.

Disadvantages of scalping

Scalping requires great attention and reaction speed, which can be very stressful for some traders. Since trading decisions need to be made quickly, there is a increased risk of making mistakes, which can lead to significant losses.
Also, to execute a scalping strategy, you need to have good starting capital to make significant profits from so many small positions.

In conclusion, scalping is a high-risk, high-reward trading technique that can be very profitable for fast, experienced traders looking to make frequent profits from small price changes, but it must be done with caution and with the right preparation. This technique is not suitable for all traders and requires a great deal of attention and a large amount of capital. Before using scalping, it is important that traders understand the risks associated with this technique and are prepared to manage them.
Please also note that information or research based on historical data does not guarantee future performance or results. Any opinions, research, analyses, prices or other information provided under the heading of general market commentary do not constitute investment advice.

In collaboration with XTB
Original article published on Money.it Italy 2023-02-10 15:43:00. Original title: Scalping: cos’è? Guida completa tra tecniche e rischi