How to make money on scalping (and how much)
Every trader has heard of aggressive intraday trading when many trades are made during the session. This style of trading is called scalping.
Below you will learn what scalping is, how to trade on this method, and what are its advantages and risks.
What is scalping in simple words
Scalping (from scalping – cut scalp or top) is a type of intraday speculative trading strategies, based on the opening of many short-term trades in order to obtain a small profit (several pips points), summing up which, the expected percentage of profitability is achieved.
In simple terms, scalping is trading inside the day, with many low-profit trades, to generate significant total income.
The word scalping comes from English scalping – cut the scalp, which means, in the context of the financial market, to take the top or, as some traders say, to remove the cream – this is the essence of this method of trading.
Scalping on Forex is often called peepsfrom the names of items on the charts of currency pairs – pips.
Many call scalping a trading strategy, but this is not entirely true – in fact, the tactic combines a lot of trading strategies that have a common feature – the rapid opening and closing of trades.
In the environment of traders scalping is considered to be highly profitable, but extremely complex, requiring a lot of discipline and experience trading strategies. There are two contradictory points of view.
- The first says that scalpers are traders forced to spend time around the clock tensely at the monitor with the trading terminal.
- The second describes scalpers as traders with a lot of free time, trading only 1-2 hours a day and leaving the market.
The truth, as always, is somewhere near. The expected one-hour trade can be delayed by a day, and short trades are not devoid of tension, after which it will take considerable time to recover.
Trade principle, basic requirements and tools
As mentioned, the essence of scalping strategies is trading inside the day. Anticipating small market fluctuations the trader opens a position, usually with pre-installed Stop Loss and Take Profit. When the market movement is worked out, the position closes with a small profit.
In high-liquidity markets there are always small “price jumps” and, therefore, you can enter the market many times during the trading session.
Collecting a small profit on each transaction, the trader eventually receives an increased total yield, and the competently set limit of the loss does not allow the position to go into a strong negative.
Obviously, the best option for such trade is volatile markets, where Ask And Bid are close together and there are no problems with the entry/exit from the position.
Any section of the financial market is theoretically suitable for making quick transactions, but due to the size of commissions, as well as the level of liquidity, most often they are concluded in the urgent and foreign exchange market. It will be suitable to conduct trading on the urgent market – futures of gold, oil and stock indices; volatile pairs on Forex.
Scalping in the stock market is inconvenient because of the need to pay for depositary service, as well as because of relatively low volatility.
Derivative financial instruments such as blue-chip futures or indices have high liquidity and sufficient volatility, while allowing leverage trading, which is very convenient for transactions with a profit of 4-5 points.
Typically, a wide range of technical analysis tools and tools are used to predict market entry.
In trading systems of this nature you can find as well-known MACD, RSI, Alligator, Heiken Ashi, and specialized indicators 3rdgenma, Avatar, Atrrange.
Very often the trading system is based on signals of two or three means of technical analysis.
Almost all scalping strategies involve limiting risks. The classic option is the profit/loss ratio of 3 to 1. The easiest in this case will be the nomination Stop Loss 3 points lower, and Take Profit is 9 points above the opening position priceAnd.
Some trading systems of this nature provide trading only at certain times of the day (night scalping) or in a certain price direction (trend, intra-channel scalping).
For convenience and speed, many traders in trading use automatic scripts that allow you to tug at the chart or press a single key to place a order with pre-set parameters (lot size, Stop Loss and Take Profit).
Widespread use of scalpers received Automatic trading systems. Their advantage in this case is obvious. Trading in a “manual” mode, especially scalping involves high tension and experiences, often a trade can master the state of tilt. And
Automatic EA is devoid of emotions and works strictly on the algorithm, which in this case is extremely important. The most famous trading “robots” today are CrazyScalper, SMART, Generic A-TLP, Sniper.
Analyzing the above can be distinguished by a number of features of scalping strategies:
- Trade is conducted inside the day (days);
- Each transaction involves the taking of the minimum profit (1-10 points);
- The share of loss per trade is also minimal (1-5 points);
- Only low-level timeframes (M5-H1) are suitable for trading;
- The use of Stop loss is usually a prerequisite in all strategies;
- Trade can be conducted as one tool, and be multi-currency;
- Trade is high intensity, meaning trades are opened very often;
- Most of all strategies focus on finding the most accurate moment to enter the market;
- Typically, the scalper trader uses technical analysis tools: indicators, support/resistance levels, Bollinger Bands, etc.;
- strategies of this type can be successfully implemented in trading advisors.
The most famous scalping strategies
As previously stated, scalping means not one, but many different trading strategies. Consider the most popular ones.
A well-known strategy. The system involves the use of 6 indicators at once, with which it is supposed to determine the point of entry to the market most accurately:
- Paramon Scalp;
- Signal Bars 6;
- Fisher Yur4ik;
- EAtrend using i_trend;
- SMA (100) and SMA (200)
Indicators are set on one chart by the M15 timeframe. For trading, the most volatile trading instruments are chosen, trades open in two directions (bullish or bearish).
The following conditions will be the signal for the opening of the “long position”:
- The price chart crosses the SMA (200);
- EAtrend’s green line crosses the red line;
- SMA line (100) above the SMA line (200);
“Short Deal” opens under opposite conditions:
- Price chart crosses SMA (100);
- EAtrend’s red line crosses the green;
- SMA (100) is below the SMA line (200).
It is a simple but reliable scalping trading system with a small set of tools. Simple moving averages (Moving or MA) are used in trading, with periods of 20 and 10.
The essence of the strategy is quite original – the opening of the position occurs when the two lines of MA divergled (usually the signal for entering the market on the contrary is the intersection of these lines). Trading takes place on the M5 timeframe, and the key is to comply with the rule – not to keep the position open for more than 1 hour.
Signal to open a warrant Buy conditions include:
- Both divergent MA lines are directed upwards;
- The price curve rebounded from the 20-period MA and broke through the top line of MA 10.
Order Sell exhibited in a different way when:
- Both divergent MA lines are directed downwards;
- The price curve will bounce off the 20-period MA and break through the bottom line of ma 10.
Take profit and Stop loss are exhibited at a distance of 10-15 points from the entry point to the market.
The main advantages of the strategy are its simplicity and low number of false signals.
The strategy is based on two well-known indicators: MACD and EMA with a period of 20. The system is suitable for most volatile trading instruments.
Trade is on the timefrayM5. When crossing the MACD zero line and crossing the EMA price curve from the bottom up, the trader waits for the chart curve to move away from the moving average by a distance of 10 points and opens a “buy” order.
Again, by crossing the MACD zero line, and passing the price chart through the EMA from top to bottom, waiting for the price to drop by 10 points from the moving average, the trader should open a “sell” order.
When placing orders on this trading system, it is mandatory to limit losses. Stop loss can be put at 3-5 points from the price of buying/selling the lot. Take profit is put at a distance of 7-10 points.
It is worth noting that a lot of popular trading advisers have written on scalping strategies. The most famous of them:
- Wall Street Evolution A trading system whose algorithm involves trading in the price corridor. The loss restriction is by automatically placing Stop loss, and profit maximization is achieved by replacing Take profit with Trailing stop. Used on the M15 chart with EUR/USD, GBP/USD and USD/JPY;
- Best Scalper A very popular advisor. The principle of its action is based on the strategy of “Night scalping”, that is, trade is conducted at night in Moscow. Most scalper trading systems require a lot of volatility in the market, but the opposite is true. Trading is conducted in a low-volatility channel, which is identified by the robot independently based on built-in indicators.
Sometimes this method of trading is also called a classic. In the case of glass scalping, the trader relies on information about the orders received in the exchange glass to buy and sell the asset, watching their ratio. An experienced scalper is able to determine which way the price is more likely to move in the short term based on the predominance of certain applications, changes in their number at certain levels and the appearance of an imbalance between supply and demand.
Reading information from a glass is one of the most important skills for a scalper, as consolidation of applications at one price may indicate the appearance of a short-term resistance level, and their execution – about the impending breakdown of this level, at which you can catch the cherished enginea few points.
This version of trading is based on the theory that all markets are interconnected, so it uses the behavior of other instruments – foreign indices, commodity market assets, exchange rates, etc. – as indicators.
Thus, the trader follows not only the schedule of the asset he trades, but also one, and more often several, “guides” – tools with which, according to the scalper, the traded asset has a correlation.
This group brings together strategies that take into account both the relationship between the various tools and the number of applications in the glass. They assume a larger amount of analysis, but also take into account more factors that affect the dynamics of quotations.
Often scalpers monitor the behavior of the tool inside the graphic patterns, opening trades during the formation of the most distinct of them – this method also helps to increase the efficiency of trading. Despite the fact that with classic intraday strategies to trade inside the shapes is not recommended, in the case of scalping it can be quite profitable.
In addition, there are strategies that allow you to work both with the formed trend, and with relatively small fluctuations and sideways movement – all this depends, first of all, on the nature of the trader and on what conditions for work he prefers. Often scalpers trade in the formed “corridor” – when the price in a side or a small upward or downward movement forms levels that can be graphically noted.
What to do if the deal goes into the red
Before considering “how to proceed with a drawdown of a trading position”, it should be noted that in almost every scalping strategy “edge stone” is the rule of mandatory nomination Stop loss. During the trade, the scalper-professional does not think about possible losses. It is most focused on finding the “right” entry point to the market.
If for any reason the limitation of losses is not established or the price has jumped the value of “Stop”, the trader is advised to close the position immediately. The strategy, where due to the loss “hangs” open position, at least ceases to be scalping, as the maximum leads to the loss of the entire deposit.
An even more complex market situation is a series of unprofitable trades. There are times in the markets when even the most efficient trading systems stop working. Orders repeatedly close with “minus” profit, and the trader embraces the desire to win back the loss at all costs. However, in this situation, the most correct solution for the scalper trader will be to close all trades and stop trading.
Scalping is a high-risk speculative type of trading, so it is necessary to learn to wait patiently for non-standard market situations.
How much can you earn on scalping
From the many definitions it can be concluded that this is a high-yield type of trade. Using such a strategy may well double the deposit for a trading session. According to the developers of robotic scalpers, back-tests of these trading systems at separate time periods show a yield of both 1000% and 3000% per annum.
At the same time, it is worth understanding that the profitability for a single time interval does not give a guarantee of permanent results. It should also be noted that the complexity of trading and high requirements for the professionalism of the trader at times reduce the likelihood of organizing work under all the rules of such trading systems. In simple terms, it will be extremely difficult for most traders to organize trading correctly.
A separate option in assessing the effectiveness of the trading system is the ratio of its profitability to the initial investments.
Scalping strategies have several features that need to be understood. Most trading systems are tested on small deposits. The recommendations of the strategy authors and developers of advisers often include amounts of $100-200, and the work is carried out using a fairly large trading leverage. In total, all this gives a high percentage of profitability, with well-established market conditions and the correct implementation of the strategy.
At the same time, in the trade of large lots, such phenomena as slippages are possible. This will not allow the trader to enter the trade in time and get out of it in time.
Problems and risks of scalping trading
Scalping on the stock exchange, as well as any work with the financial market, carries certain difficulties and risks. They need to be controlled in order to successfully trade financial instruments and profit from it. To the mostserious problems for the scalper can be attributed:
- Psychological. Constant control and analysis exhaust not only physically, but also morally. In addition, with the increase in the total number of transactions, the number of those closing at a loss also increases. Since losses are an integral part of trading, many traders are ready for this, but not everyone is able to adequately accept, for example, 50 losing trades per day, especially if they occur in a row. Entering the tilt during scalping is many times more dangerous, because the loss of control over itself will immediately entail new losses and subsequent aggravation of this condition. In order to avoid this, it is necessary to have iron nerves.
- High risk. Since the account is opened and closed for seconds for scalper trading, stop orders cannot always be adequately used, especially if the trader trades manually. For this reason, nothing insures the scalper from a serious movement of quotations against a position, the losses from which can be many times greater than the planned profit. Currently, you can download a lot of apps that facilitate scalping, and some of them have a function for quick stop-and-see, but the best programs for this cost a lot of money. For this reason, the skill of quickly limiting one’s losses is also important.
- Technical risks. Scalper deals are much more sensitive to the lag of commands, because of which a two-second internet freeze can cost the trader a lot of money.
In addition to the above problems, there are other drawbacks of this style of trading. However, he, like any other, has many positive aspects.
Pros and cons
Scalping has several significant advantages over other methods of making deals. The main ones include:
- High potential profitability. As practice shows, scalpers get the most profit in a limited period of time among all traders. One of the reasons for this is the almost complete absence of initially profitable deals, going into a loss, because even a small profit is fixed almost immediately.
- Small investment. Passive and long-term investment requires very substantial sums of money, otherwise the profits they bring will be ridiculous. Scalping allows you to trade a couple of hundred dollars and quite seriously count on profits, for which long-term investors would need several thousand.
- Low risk of a single deal. Due to the small volume of investments, the risk of high losses from one trade is also reduced. In addition, most scalper strategies involve fixing losses at their minimum values.
- Plenty of entry points. Since small fluctuations occur much more often than large ones, the scalper does not need to sit outside the market all day waiting for the same signal – it can open a position at almost any time with acceptable volatility of the asset.
- The ability to automate. Scalping allows the development of a purely mechanical strategy, which in the future can be automated with a trading robot.
However, there are also a few significant drawbacks that need to be taken into account when choosing a trading strategy in this style.
- Risk-to-profit ratio. Due to the speed of transactions, the ratio of conditional take-profit and stop-loss in scalping is usually at 1:1 or slightly higher, while the normal value for medium-term strategies is 1:3-1:9. Accordingly, in order to maintain a positive yield, the percentage of successful scalping trades should be higher.
- It’s time. Scalping takes much more personal time of the trader than medium-term, or even longer-term trading. However, it is impossible not to mention that the experience brings the appropriate.
- Commission. Due to the large number of transactions, commissions, especially when choosing a bad broker, can eat up to a third of the profits received by the scalper, while in the case of longer-term ways of trading, the amount of the fee charged is almost invisible against the background of profit.
It should be understood that when choosing scalping, there is a possibility of a single transaction to negate all profits earned during the day on small movements.
There are a few fairly obvious recommendations that novice scalpers often do not follow, which is why they subsequently receive nothe results that we were counting on. These include:
- Don’t recycle. Fatigue leads to impaired concentration, and it leads to unprofitable trades. Once the trader has felt that he is no longer in the best shape, the trading should stop immediately.
- Trade at a convenient time. Do not try to hard to make a deal for a deal all day long – it is better to choose for yourself such periods when the behavior of the price of the asset is most disposed to trading using a specific scalper strategy.
- The right broker. When choosing a financial intermediary, you need to pay attention to the size of his commissions and the presence of separate prices for scalper transactions – this can significantly increase the total profit, as prices from different brokers can vary several times.
- Tool. Do not chase a popular or well-known financial asset – for scalping it is best to use those tools, reasons and options for price movements that are really clear to the trader.
- Discipline. It may seem that scalping is simple, but it is very important to observe strict discipline, as this style of trading is often strived to turn into a gambling game, in which the foreground is not a strategy, but a belief in luck. Of course, this approach does not end well – to achieve the result you need to stick to your trading strategy.
Compliance with these simple tips can bring the scalper closer to the desired level of profit.
Having considered the possibilities of scalping strategies, we can come to several conclusions.
- Scalping is a complex speculative trading system, which will be properly implemented only by an experienced trader.
- Also scalping is not suitable for trading with a large deposit, because in this case the effectiveness of the system will naturally decrease (which is why serious market players do not use this method).
- As you can see, the applicability of scalping trading systems is limited. However, it is interesting to use a trading system for the so-called “dispersal” of the deposit. That is, having a deposit of $100, the trader can increase it to $1000-2000 in a short period of time, and then switch to work on another trading system.
- Also, the scalper trader in theory can regularly withdraw the profit, leaving on the deposit the optimal amount for work. However, the complexity of scalping trading systems in this case calls into question the regularity of obtaining such income.
The skills of the scalper are considered to be the highest aerobatics among traders, as they require high concentration, ability to analyze quickly and spend a lot of time. However, at the same time, the potential profitability of scalping is quite able to recoup investments in its full development.