The Appeal and Precautions of Scalping
FX Scalping Complete Guide: Thorough Explanation of Short-Term Trading Strategies, Indicators, and Suitability
Table of Contents
2. Technical Indicators Necessary for Scalping
2-2. RSI (Relative Strength Index)
3. Merits and Risks of Scalping
4. Differences Between Scalping and Other Trading Styles
Scalping is a trading method that involves making repeated trades to capture short-term price movements, and it is considered a field requiring advanced skills even among professional traders.
On the other hand, it is also true that its abundance of profit opportunities makes it an attractive style for many traders.
This article systematically explains everything from the basic mechanisms of scalping, the technical indicators used, differences from other trading styles, and the type of person it suits.
1. Overview of FX Scalping
Scalping is an ultra-short-term trading method that uses short timeframes like 1-minute or 5-minute charts, holding and closing positions within seconds to minutes.
It is not uncommon to make tens to hundreds of trades per day, aiming to accumulate profits from small price movements (a few pips).
The main characteristics are as follows:
- Numerous profit opportunities due to high-frequency trading
- Strategy of aiming for profit in units of a few pips
- Reducing transaction costs by choosing currency pairs with narrow spreads (e.g., EUR/USD, USD/JPY)
To practice this style, the precision of the trading environment, such as fast execution speed and low slippage, is also an important point.
2. Technical Indicators Necessary for Scalping
In scalping, the precision of entry and exit determines success or failure. The following are typical technical indicators that are practical and versatile.
2-1. Moving Average (MA)
An indicator that allows visual grasp of short-term trends.
In particular, the crossover of the 9 EMA and 21 EMA is used by many scalpers as a buy/sell signal.
2-2. RSI (Relative Strength Index)
An indicator for measuring the market's overbought/oversold conditions.
It is used as an aid for timing reversals, judging "overbought" when RSI is above 70 and "oversold" when below 30.
2-3. Bollinger Bands
Visualizes the current range of price movement using standard deviation.
Strategies that use reversals when price reaches the outer bands or breakouts resulting from band contraction are also effective.
Combining these indicators can improve accuracy and provide a basis for discretionary judgment.
3. Merits and Risks of Scalping
Merits
- Reduces position holding risk as trades are completed in a short time
- Less affected by long-term economic indicators or sudden news
- Minimizes opportunity loss as profits can be accumulated even from small price movements
Risks
- Requires quick judgment, which can lead to high mental stress
- Attention needed for increased costs due to accumulated spreads and commissions from numerous trades
- Significant impact on profit/loss if communication delays or execution errors occur
Important Note on Transaction Costs
Since scalping involves a very high number of trades, accumulated costs from spreads and commissions can significantly reduce profits. It is crucial to always be mindful of costs when choosing an account and formulating trading strategies.
4. Differences Between Scalping and Other Trading Styles
Difference from Day Trading
Both are classified as short-term trading, but day trading assumes holding positions for several hours to a day, whereas scalping completes trades in seconds to minutes.
Also, while day trading is susceptible to the influence of fundamentals, scalping tends to focus purely on chart price movements.
Difference from Swing and Position Trading
Swing trading and position trading are medium to long-term styles that assume holding positions for several days to weeks, or even months in some cases.
These methods aim for large price movements by understanding the overall trend, and differ from scalping in timeframe, targeted profit margin, and risk management techniques.
5. Who is Scalping Suitable For?
Scalping is considered suitable for individuals with the following qualities:
- People who are good at making decisions in a short amount of time
- People who can react sensitively to small market changes
- People who feel anxious holding positions for long periods
- People who want to leverage their concentration and quick reflexes
On the other hand, it may not be suitable for those who prefer to carefully build strategies over time or those whose lifestyles do not allow for frequent chart checking.
6. Conclusion
Scalping is a trading style that allows for accumulating profits in a short time but demands advanced skills, judgment, and mental stability.
Precisely because it appears simple, meticulous strategy design and thorough self-management are indispensable.
Especially when practicing it as a trading style to be evaluated at an exam-based prop firm:
- Consistency in entry and exit
- Logical design of risk-reward ratio and stop-loss
- Ability to act based on strategic judgment rather than emotion
are essential.
When attempting scalping, aim to first gain experience with small amounts and limited time, and focus on developing the ability to "act according to plan" rather than "acting reflexively."
That will be the first step towards becoming a professional.