scalp trading

Scalping, a trading strategy involving very short-term trades to profit from small price movements, follows several key principles:

Speed: Scalpers need to execute trades quickly to take advantage of small price fluctuations. This often requires fast trading platforms and high-speed internet.

High Frequency: Scalpers typically make many trades in a single day, aiming for small profits on each one.

Technical Analysis: Scalpers rely heavily on technical indicators and charts rather than fundamental analysis. They use tools like moving averages, Bollinger Bands, and oscillators to make decisions.

Tight Spreads: Scalpers often trade in markets with tight bid-ask spreads to ensure that transaction costs don’t erode their profits.

Discipline and Focus: Given the rapid pace and high number of trades, scalpers need to stay highly focused and stick to their trading plan without emotional distractions.

Risk Management: Effective risk management is crucial to protect against significant losses. Scalpers often use tight stop-loss orders to limit potential losses.

Leverage: Scalpers may use leverage to amplify their trades, but this also increases risk. Proper leverage management is essential.

Market Liquidity: Scalping is generally more effective in highly liquid markets where large volumes can be traded without significantly impacting the price.

These principles help scalpers navigate the fast-paced nature of their strategy while managing risks effectively.

Before we delve into this topic, let’s review a few fundamental and basic principles in the market:

First Principle: The longer a trader remains in the market over time, the higher the risk of encountering danger and experiencing losses, even if they are currently in profit.

Second Principle: Statistically, the more frequently an event occurs, the less likely it is to repeat in the future. For example, in an uptrend, as the price advances further, more individuals—each possibly using different styles and methods—enter the market at various times and align with the trend. Therefore, the probability that the price will continue to rise at the same pace and momentum diminishes, and the financial and psychological persistence of trend-following traders may decrease. Additionally, the price direction may change due to the liquidation of traders who entered the trend earlier or the strengthening of traders opposing the trend.

According to the second principle, the likelihood of smaller price movements occurring is higher. This means that the probability of the price rising by 15% after a correction and then reversing (as in the previous example, with an 80% probability) is greater than the probability of a 30% rise followed by a failure to continue the trend (as in the previous example, with a 70% probability). Similarly, for higher percentages, according to the first principle, since we exit the market earlier (in this example, after a 15% rise) and spend less time in the market, we are less exposed to risk. This is because at any moment, due to a news event or any occurrence, market sentiment may shift, changing the flow of orders and potentially resulting in the loss of our profits or even generating a loss (for example, causing slippage where the price moves beyond our stop-loss without activating it). Additionally, issues like a power outage, internet disconnection, or an unexpected visitor can prevent us from implementing dynamic management effectively.

Now, consider the following scenario: Suppose we have entered a trade on Chart B, where the distance between the entry point and our stop-loss is 100 pips, and the first level where we set our take profit (TP) is 133 pips. Now, imagine another trade on Chart A gives us an entry point, with a stop-loss of 300 pips. If we want to take the same 133 pips from the market and exit, our chances of success are much higher in Chart A compared to Chart B. This is because, on Chart B, the price would need to rise by almost a full movement to reach the TP, whereas on Chart A, the price only needs to move by about 40% of a full movement to hit the TP. Given the previous discussion, the probability of the second scenario (Chart A) is much higher than the first scenario

To increase the likelihood of a successful trade, the scalping system helps traders achieve smaller take profits without altering the trade volume or timeframe, meaning without changing their trading plan. By focusing on smaller profit targets, scalping ultimately increases the probability of profit and reduces the probability of loss, resulting in a positive overall trading performance.

In a scalping system, regardless of the timeframe, the trader places their take profit (TP) at a level where the probability of hitting it is higher. In other words, scalping is a type of strategy that provides a higher probability of success for exit points.