The Diary of a Trader: July 2020

Saturday, July 18, 2020

What is Forex Scalping? – Forex Scalping Definition

In order to understand What is Forex Scalping, you need to understand what the term “scalping” actually means. When you are looking to “scalp the market”, you are looking for short term trades, sometimes lasting just a few moments. Because of this, you are not worried about economic conditions or fundamental analysis, you are worrying about places that you may or may not see momentum in the market.

In order to be an effective scalper, you have to be able to get in and out of the market rather quickly. This is because you are not necessarily looking for anything more than a quick gain, taking advantage of little pockets of illiquidity or spaces of “thin air” in the market. Once you get good at reading charts, you can start to recognize support resistance, and more importantly in this case: micro support and micro resistance. It is not uncommon for a scalper to have trades that last for just a few minutes, or even just seconds. Because of this, it takes a very quick mind and nerves of steel to do this type of trading.

Why someone would be a scalper

There are a multitude of reasons why somebody might be a scalper, not the least of which is that it is much “safer” to be in and out of the market that it is to hang on to a long-term position, possibly even losing money overnight while you are not in front of the computer. A true scalper would never consider holding a position overnight, or for that matter several hours. They are looking to pick up little bits and pieces of profit along the way. Many scalpers will point to the fact that they are simply “small fish in a large ocean”, referring to the larger institutions out there. In that sense, they are a bit afraid of going up against the large institutions, but also know that they have an advantage in the sense that they do not have to put so much into the market, meaning that they are going to be much more nimble both entering and exiting.

Scalping takes extreme concentration and discipline

Scalping is not something that you do on a whim. It takes extreme amounts of concentration and is something that also takes a lot of skill. Quite frankly, scalping is not something that traders should do until they have quite a bit of screen time in front of them. Having said that, you can always use a demo account as a great way to practice in live conditions.

Perhaps even more important is the ability to have discipline when trading. If you are in a losing trade, you need to get out sooner rather than later. This is because if you are not quick to take your losses, they can compound rather quickly. This is because quite often scalping is done with large positions, so therefore it can compound against you. Speaking of which, you need the discipline to trade in manageable sizes. Remember, as a scalper you are trading little micro movement, not something that it is developing over the longer term, meaning that the slightest little deviation in monetary flow can move the market for or against you.

A couple of ways to scalp

The first ingredient of a decent scalping market is to find one with a small spread. This is because a market that has say seven pips for the spread, you could struggle to overcome that wide of a gap. However, in a market like the EUR/USD pair that has little in the way of a spread, it makes your job much easier.

Brick walls

When you look at markets, quite often you will see areas where the market cannot get through. You may see several candles in a row that are struggling at the same price, showing that there are either buyers or sellers in that range. If that is going to be the case, then obviously if the market breaks through that level it means that it is likely to continue going in that direction, at least for the short term. You can see the set ups all over the place on short-term charts, but you need to be patient enough to see the market break through these levels. Quite often, a trader will wait for a break of one of these “brick walls” in order to pick up three or four pips. Obviously, it comes down to your trading plan, but that is just an example of how they can be taken advantage of as there will be a little bit of a lack of orders against you once you break through that initial barrier.

Round number bounce

Another potential trading opportunity is when the market is sitting at a round figure. For example, the 1.10 level could be an area of a lot of interest due to the psychology of that big figure. However, there are also other ones that are minor large, round, psychologically significant numbers that could also attract a lot of attention. For example, the 1.08 level might attract a lot of attention. Quite frankly, a lot of scalpers will simply play for a bounce from that level, as they know a lot of the larger funds will have order flow in that area. Again, we are simply looking for a short-term gain of just a few pips.

Make it your own

At the end of the day, you are going to need to trade how you are comfortable with, because of course there is a certain amount of psychology and comfort that is needed in order to be able to perform on a consistent basis. Because of this, you need to demo trade your scalping ideas and recognize when things are working against you. You have to have enough confidence to get out when it is time to, and enough patience to wait for the set up to occur. Even though you are only trying to scalp the market, it is not uncommon for a scalper to sit around and wait for just a couple of opportunities during a trading session. It is not constant action, rather it is quick in and out when you are active.

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