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By: DailyForex.com

What is Scalping?

Scalping is a style of trading that has become very popular, mainly because it provides a lot of opportunities to make money. It is also very quick. Although there is sometimes a lot of waiting around, the profit or loss usually comes very quickly, so you do not have to sit biting your nails for hours wondering whether the trade is going to be a success, and where you should exit it. Very often the whole trade takes only a few seconds.

Scalping is the act of making fast trades for (usually) small profits, in and out for a few pips.

What Do I Need to Scalp Successfully?

Before we get too involved in the question of how to do it, you need to be properly equipped to do it right to have a chance of succeeding. Unfortunately, just knowing how to do it is not enough. This is because the essence of scalping is taking advantage of fast execution and reasonably tight spreads. If your broker is unable to offer these, then even if you know what are doing and do it right, you will not be able to scalp profitably. So the first thing you need is a high-quality broker that executes trades quickly without rejecting them just because the market is moving fast. At the retail level, this is not so very easy to find.

Which Pairs Should I Scalp?

There are two types of directional trading, by which I mean traditional long or short trading. You either bet that the movement will continue from a particular level, or that it will reverse. Either way, what are relying on in order to make a profit is the meaningfulness and quality of support or resistance levels. This leads to an important point which is often neglected: major pairs produce more meaningful support and resistance levels, because they are real and not synthetic. For example, if EUR/USD has not touched 1.30 in a long time, and after falling more than 100 pips hits that level, it is very likely to make some kind of bounce upwards, providing an opportunity for a long scalp. If EUR/AUD has not touched 1.30 in a long time, it is less likely to provide a bounce, because what is really important is what is going on with EUR/USD and AUD/USD. So stay away from crosses, unless both of the crossed currencies have a scalp at exactly the same time against the USD.

You should stick to the four majors and perhaps also AUD/USD and USD/CAD. Notice that the JPY is looser than the USD, and for this reason can be harder to scalp.

Strategies for Scalping

Simple put, you are going to get better results by looking for bounces instead of continuations. This will tend to mean trading against the trend, or at least the short-term trend. Do not worry about that. What you need to do are look for levels that are likely to provide a bounce. They key levels to look for can be found as follows:

Highs and lows of previous days, weeks and months, especially where that end of the cdle is wicky.

Weekly and monthly opens.

Round/whole numbers.

Pivot points.

The first two are the most important. Where they are confluent with round/whole numbers and pivot points, they are even stronger. Where there are several of these levels lined up together, they become even stronger. If the anticipated reversal is in tune with the long term trend, this is even better, but not essential.

The most important thing however is not just to identify the most probable levels at which there are going to be bounces. What is important and often overlooked is HOW the price gets there. As a rule, the faster the price moves there, and the greater the distance it has to travel to get there, the better. For example, if the Average True Range of the previous twenty days is 100 pips and the price races up to a round number that was also last weeks high and is approximately 100 pips from todays low, you have a high probability of a bounce, so you can probably make some short pips off this level.

Executing Scalping Trades

There is no substitute for executing these trades manually. Of course if you think 1.30 is going to be a good level for a bounce, you could set an order at that level. However, sometimes the price might stall just half a pip away from that level before turning around, in which case your order would not get filled. For this reason, it helps to scalp with your finger on the trigger manually for both entries and exits. This is why it is so important that you use a good broker.

The advantage of scalping is that you only need and expect to get out with a few pips of profit. This is another reason why you need to have your finger on the trigger and your eye on the price. You will feel where the price is starting to turn.

It is a good idea to take something like 80% or 90% of a winning trade off at the first pause, an leave the rest on the table while moving the stop loss to break even. You will eventually get some huge winners where what began as a scalp can become a major long-term swing high or low.

Perhaps the hardest thing about scalping is knowing where to put your stop loss. It might be better to just put an emergency stop loss on and get out manually when you feel the level really start to break in the wrong direction. It is worth remembering that it helps to keep stop losses tight, because where you are looking for bounces, the good trades should bounce pretty tightly.

Following these rules takes some practice, and scalping takes as much patience as any other type of trading. These are tried and tested guidelines. Good luck!