SCALPING - is it worth it?

Scalping is one of the most popular methods of trading on Forex market among individual investors. So it can be assumed that if it is so common, it is probably also profitable and effective. Are you sure? Before we answer this question, it is worth explaining briefly what is scalping on the currency market.

What is Scalping in Forex

There is no single, rigid definition of this trading methodology. To simplify the whole concept, scalping is about making very short transactions. Very often they close to a profit (or loss) on a low yield in pips (the profit in the currency depends on the volume) or a slight negative. In other words, it is based on "Cutting off pip pieces" from the market, taking for himself his "skalp"Analogous to what the Indians in the Wild West shamefully prided themselves on. The methodology deciding on the moment of entering and exiting the market is of no great importance here, as well as the fact whether the transactions are concluded manually "out of hand" or by automatic machine.

Some brokers, mainly those who forbid the consolidation, define scalping in their own way, and so that they can enforce these bans clearly, they introduce it into a stiff risk, e.g."Scalping is any transaction lasting no more than 5 minutes or closed with a profit of no more than 5.0 pips". The more smart-worms leave an open wicket without specifying a time-and-pound frame.

Why scalping can be forbidden

That's an interesting question. If a broker prohibits scalping, it usually works in Market Maker model (although there are exceptions), so if you prefer this style of trading, it is worth making sure that the company in which you keep the account accepts it. If not, it is best to ask for the definition in writing or for a point in the regulations that proves it.

Why are some brokers not accepting scalpers?

Usually, the problem lies in securing transactions in the market. The shorter the transaction, the harder it is to do it effectively. If we trade with the Market Maker broker, it becomes the other party to our transactions. Then the broker independently accumulates all the positions of its clients and selects the rest of the volume (so that it is equal) on the interbank market, so that its exposure to risk is as low as possible, and preferably zero. How does it look in practice:

• 4 long flights for Client A,
• 3 short flights are opened by Client B,
• and 3 long flights are opened by Client C.

The total exposure is therefore 4 long flights. This is how much the broker needs to secure.

At least that's what it looks like in theory. In the event that the scalper concludes many very short trades lasting up to several seconds, the broker's exposure to risk changes dynamically. Especially if we are dealing with a large volume, this means that despite the fact that the company operates in accordance with theoretical assumptions, it will lose on such a customer.

Is scalping worth using?

Knowing the basic technical issues, we can slowly move to the heart of the topic. Is it worth using scalping in forex? First of all, it depends on the adopted one strategies and whether it will be profitable and whether our broker will allow us to do so :-). However, we assume that the answer to both questions is yes.

READ NECESSARY: Day-trading and scalping - where are the differences and which is better?

In general, scalping makes our time spent in front of the charts longer, but at the same time "flies down" faster because more is happening. A large number of trading signals and transactions concluded, combined with a low interval, make the action much more lively. Thus, we get rid of the itchy finger syndrome, where we do not have to wait sometimes and weeks for the appropriate signal to make a position, which is the case with long-term strategies. However, it is followed by a greater psychological burden resulting from the continuous realization of profits and losses on the account. This is undoubtedly an approach to trading that not everyone will be able to endure.

In addition to the psyche and the strategy itself, there are two additional things that decide whether scalping will be effective:

1. transaction costs,
2. execution of orders.

In many transactions with low profits, the first factor turns out to be a key factor and largely affects our final financial result. Imagine a situation where we make a day 50 transactions and their average profit is 5.0 pips not including spreads and commissions. That gives us optimistic 250 pips a day. If we trade on EUR / USD at a broker with a spread (no commission for the sake of simplicity) 1,5 pips this day we will pay about 75 spread pips. This until 30% our profit. If you manage to reduce the transaction costs by 0,5, the total cost will automatically drop by as much as 10%. Here, too, we have a certain advantage, because while generating a large turnover, we simultaneously gain a large commission for the broker - this is a bargaining chip in the event of negotiating commission rates, i.e. reducing our costs.

Execution of orders

Why execution of orders is so important with scalping method? With a small target profit of a few pips, we have a small margin of error and every half a second can have a large impact on the price at which our transaction will be concluded. As a consequence, our intended TP will or will not be achieved. You might think that even with a precise market entry, 0,1 pips one way or the other will not matter much. If it does happen occasionally, it's actually the right, healthy approach. Whereas if our broker The sum of the sum of really good execution of orders does not provide us and this type of situations will happen notoriously, and we will note a price slippage on the opening or closing of a position of 0,1-0,3 pips at the end of the month.

Often the composition of these two factors ultimately determines whether a given consolidation strategy earns or brings losses. Scalping teaches us to respect the pips a lot more, and this science is always profitable, but we must prepare ourselves accordingly. Both in terms of the selection of the broker and strategy as well as the psyche.