February 13, 2012 7:21 PM EST
Most of us know the term "scalping" from grabbing those concert tickets or football tickets outside a sold out event. Now it is even legitimized and there are online scalping businesses. For instance you can hardly get a ticket for the more popular shows in Las Vegas, because ticket agencies have bought all of them. They then remarket them, above the purchase price and also add handling and processing fees. As the demand increases so does the price, and the closer the date or the better placement of the seat so increase the price? You also need to remember that they also end up with unsold tickets for each show or sell last second seats at under value. So they make huge profits on the goods sales and take minimal losses on the bad sales. You will be surprised how this applies to forex trading.
Let's look at how scalping applies to the forex market. Let's first begin with the definition of scalping. Scalping to begin with is a trading strategy. Scalping is trading to profit by just a few "pips" and doing it within a short period of time, usually seconds. Furthermore a scalper is someone who will make hundreds of trades a day, using an approach designed to pick up a couple of ticks over and over again. These trading strategies are employed by forex traders for taking profit from intraday price oscillations occurring on the currency market. As a rule, deals remain opened during only several minutes. One position will not bring much profit so these strategies require a huge number of deals.
A scalper or a "pip"ser can execute about two hundred deals per day. However, no all deals are profitable. The result for a trader is positive summary of deals by the end of a trading day. The stop-loss level set as close to the opening price as possible enables a trader to achieve the positive result. Stop-loss is necessary for minimizing the risks in case a price moves in the opposite direction.
During the day a price is moving up or down in a certain period of time according to the cycle. If the price passes about 60 pips during the day the difference between high and low points will be much more. Chances of getting profit increase if you trade on the hourly price oscillations.
Imagine, if you enter multiple trades continuously, with stop-losses at 1-2 pips from the entry point and set your exits points at 30 pips, as the markets vibrate throughout the day, you will get stopped out of many trades losing 1-2pips but you will make profit of much more when the trades go in your favor, so you can leave a successful trade at 30 pips or pull out as the trade peaks up just grabbing a couple pips, as long as at the end of the day, you have gained more pips then you have lost on your total trades you are profitable, but you have to make hundreds of trades to make it worthwhile. If out of every 5 trades you lose 4 losing 2 pips each and your profit from one trade making 10 pips, you are netting 2 pips which isn't much, but doing this with hundreds of contracts daily can make huge rewards with minimum risks.
Novices may think that scalping allows earning huge amount of money and the opportunity of reinvesting may turn it to the enormous sums. However, it is not that simple. There are several disadvantages of such trading methods.
To Develop a Strategy you need to consider these points
- Setting the stop-loss level close to the opening price increases the risk of losses even during the insignificant price oscillations. Even if you succeeded to predict further direction of the price movement the possibility of losses are still very high if you incorrectly evaluate the back bullish or bearish force on the market. It is much easier to make a mistake determining the price movement direction for a short period of time (one-two hours) than for the whole day.
- The decision can be the absence of order but in this case a trader has a risk to lose even more money after the unfavorable price movement when it goes so far that the pullback is impossible in the nearest future.
- Emotional excitement and nervousness possessed by most traders who work with real money. As a rule all traders start on demo account because it allows testing the strategy with the virtual money. Consequently, trading on real account causes anxiety which is strengthening with every pip in case the market moves in the unfavorable direction.
In general, scalping is for experienced traders.
There is also one more evident disadvantage for traders - brokers do not like those who accomplish the great number of deals daily. Traders who open deals almost every second are asked to close their accounts or imposed the limits. You have to also find a broker that will allow this type trading and also whose spread is tight enough to allow you to profit employing this strategy.