Scalping exploits the micro-variations of prices on the financial markets to allow the trader to multiply very short-term capital gains. Explanations.
Scalping, a very short-term trading strategy
To make money on the financial markets, the Trader has a wide range of Trading strategies at his disposal. However, one of them enjoys a special status: Scalping.
This very short-term Trading strategy appeals to many proprietary Traders, in particular because of the frequency of gains generated. Modest gains, admittedly, but when put together, can sometimes generate very good trading performance!
In this article you will find a summary of the information you need to know about Scalping, as well as some practical advice on how to start trading seriously with this strategy.
What is Scalping?
By definition, scalping is a Trading strategy based on exploiting very short-term variations in the stock markets.
Also referred to as micro-Trading, this intraday Trading strategy allows the Trader to multiply the number of round trips during the same trading session in order to pick up a few points or pips in the space of a few seconds.
Not to be confused with High Frequency Trading (HFT), Scalping is essentially based on rigorous risk management and the Trader’s ability to concentrate.
Advantages and disadvantages of scalping
Thanks to scalping, the trader maximises his success rate by accepting modest but highly probable gains (whether through the positioning of very close take-profit orders or by taking a manual profit as soon as the trade goes green).
The frequency of these “small wins” favours the creation of virtuous circles in which stress fades and confidence increases. Scalping thus limits the risk for the Trader of losing his means under the effect of an uninterrupted series of losses.
Nevertheless, scalping is obviously not a miracle trading strategy, and the strength of this strategy is also its first weakness. As the success rate is high, but the gains per trade are relatively low, it is essential for scalping to control the level of its losses with the utmost rigour.
Indeed, a single loss can be enough to annihilate the gains of more than ten winning trades. It is therefore essential for the scalping trader to adopt a precise money management strategy and to stick to it at all costs.
How to Scalping?
In order to capitalise on market micro-movements, scalpers generally use CFDs and Futures, with a preference for Futures contracts in order to take advantage of the Bid/Ask spread in the order book.
The simple opening of a Trading account then makes it possible to engage in scalping, provided that you have sufficient financial space to buy and sell the financial products in question.
As for the preferred market for scalpers, this is generally the market for stock market indices, so as not to be exposed to the specific risks of equities. Due to the absence of an “official” market with an order book, the foreign exchange market (FOREX) is more in line with the expectations of longer-term traders: swing traders.
5 tips for a winning scalping strategy
Although no advice can guarantee success, the good practices listed below can help you improve your performance.
- Minimise your brokerage fees
Without a competitive brokerage offer, most of the realised capital gains can quickly disappear under the effect of the spread and costs of all kinds. In view of the large number of trades placed by the scalper, it is therefore essential to reduce brokerage fees as much as possible in order to maximise its net performance.
- Enhance the quality of execution
But be careful, minimizing your brokerage fees must not be to the detriment of the quality of order execution! Indeed, responsiveness plays a crucial role in scalping, so the scalper cannot afford to have his order executed too late or at the wrong level. In order not to unnecessarily endanger himself, the execution quality of his financial intermediary must therefore be irreproachable.
- Provide yourself with a professional working space
If the quality of execution is paramount on the side of the financial intermediary, it is also paramount on the side of the scalper. The scalper must therefore make every effort to be responsive and precise. Consequently, his trading station as well as his stock exchange software must be adapted to his intensive trading practice.
# Opening an account on the ProRealTime trading software allows you to create a scalping space that is tailor-made and fully adapted to the requirements of this trading strategy.
- Adopt rigorous Money Management rules
As we have seen, a few poorly managed losses can be enough to destroy the performance of your account and cut your trading capital at any minute. To avoid any disappointment, it is therefore better to anticipate and put in place a set of rules to be respected in order to manage your capital well.
Such a practice, known as “Money Management”, will require, for example, knowing in advance your exit scenario in case the situation does not evolve as expected. It may also require you to have maximum leverage as well as daily or monthly loss limits.
- Learning to manage your emotions
Finally, the best Money Management rules in the world will be of no use to you if you don’t stay in control of your emotions and apply them consistently. With Scalping, the omnipresence of opportunities can quickly lead you into over-Trading and make you act when you should have passed your turn and waited for a better configuration. To avoid this kind of drift, it is therefore better to take breaks during a trading session and concentrate on a few strategic time slots.
As with any trading strategy, all the theory in the world cannot replace practice. The best way to discover scalping and to progress is to try your hand at it, for example by paper trading with a free demo account.