Scalping is a commercial strategy designed to benefit from small price changes, with gains in these operations taken quickly and once an operation has become profitable. All forms of negotiation require discipline, but because the number of operations is very large and the profits of each individual operation are so small, a reseller must have a rigid adherence to their trading system, avoiding a large loss that could end With dozens of successful operations. trade winds.
Resellers will obtain many small profits and will not execute any winner, to take advantage of the profits when they appear. The goal is a successful business strategy through a large number of winners, rather than a few successful exchanges with large winning sizes.
The speculation is based on the idea of a lower risk of exposure, since the real-time in the market in each operation is quite small, which decreases the risk of an adverse event that causes great movement. Also, consider that smaller movements are easier to obtain than larger ones, and smaller movements are more frequent than larger ones.
1. Trade scalp using the stochastic oscillator
Scalping can be achieved using a stochastic oscillator. The stochastic term refers to the point of the current price in relation to its range over a recent period of time. When comparing the price of a security with its recent range, a stochastic attempt to provide potential inflection points.
Scalping with the use of this oscillator aims to capture movements in the trend market, that is, one that moves up or down consistently. Prices tend to close near the extremes of the recent range before an inflection point occurs, such an example is seen below:
In the previous chart, from Brent over a period of three minutes, we can see that the price is moving higher, and the stochastic lows (marked with arrows) provide entry points for long operations when the black line% K crosses above the dotted red line% D The operation closes when the stochastic reaches the upper end of its range, above 80, or when the bearish crossing appears when the% K line crosses below% D.
On the contrary, short positions would be used in a market with a downward trend, with an example below. This time, instead of “buying the sauces”, we are “selling the demonstrations.” So we will look for bearish crosses in the direction of the trend, as highlighted below:
2. Trade scalp using the moving average
Another method is to use moving averages, usually with two relatively short terms and one much longer to indicate the trend.
In the examples below, in a three-minute EUR / USD chart, we are using moving averages (MA) of five and 20 periods for the short term, and an MA of 200 periods for the long term. In the first graph, the long-term MA is increasing, so we want the five-period MA to cross over the 20 periods and then take positions in the direction of the trend. These are marked with an arrow.
In the second example, the long-term MA is decreasing, so we look for short positions when the price crosses below the five-period MA, which has already crossed below the 20-period MA.
It is important to remember that these exchanges go with the trend and that we are not trying to catch every movement. As in all scalping, proper risk management is essential, with vital stops to avoid major losses that quickly erase many small winners.
3. Trade scalp using the parabolic SAR indicator
The parabolic SAR is an indicator that highlights the direction in which a market moves and also attempts to provide entry and exit points. SAR means “stop and reverse.” The indicator is a series of points placed above or below the price bars. One point below the price is bullish, and one above is bearish.
A change in the position of the points suggests that there is a change in the trend.
The following chart shows the DAX on a five-minute chart; Short operations can be performed when the price moves below the SAR points and is longed for when the price is above them. As you can see, some trends are quite extensive, and on other occasions, an operator will face many losing operations.
What you need to know before scalping
Scalping requires a merchant to have iron discipline, but it is also very demanding in terms of time. While longer-term time frames and smaller sizes allow merchants to move away from their platforms, since possible entries are less and can be monitored from a distance, scalping demands full attention from the merchant.
Possible entry points may appear and disappear very quickly, and therefore, a trader must remain tied to his platform. For people with daily jobs and other activities, scalping is not necessarily an ideal strategy. In contrast, longer-term operations with larger profit targets are more appropriate.
Scalping is a difficult strategy to execute successfully. One of the main reasons is that it requires many operations over time. Research on this topic tends to show that the most frequent operators simply lose money more quickly and have a negative equity curve. Instead, most operators would find more success and reduce their time commitments to trade, and even reduce stress, by seeking long-term operations and avoiding speculation strategies.
Scalping requires quick responses to market movements and the ability to forego an operation if the exact moment is lost. “Chase” operations, along with the lack of stop-loss discipline, are the key reasons why resellers are often unsuccessful. The idea of being alone in the market for a short period of time seems attractive, but the chances of being stopped in a sudden movement that quickly reverses are high.
Trade is an activity that rewards patience and discipline. While those who succeed in scalping demonstrate these qualities, they are a small number. Most operators are better off with a longer-term vision, smaller position sizes and a less frantic pace of activity.