I got interested in forex because of the promises made by forex robot vendors. While my experience with robots was hit or miss (at best), the trading bug bit me hard.
I came across a form of trading called “scalping”, as most novice traders do. Scalping is “a trading strategy that attempts to make many profits on small price changes”, according to Investopedia.com.
You want to get into the market, bank some quick profits and get out of the market.
What Drew Me To Scalping Trading Strategies
Flexibility
Since I would only be going after small profits in the market, I thought I would be able to trade any time of the day or night. I thought I would be able to wake up and make some decent money while I enjoyed my morning coffee. Imagine how nice the rest of the day feels after collecting nice profits in the morning.
I also thought I could just pick any time to get into the markets for some quick profits. If I was bored, or couldn’t find something to watch on TV, I could open my trading platform and make some money. Can’t sleep? Just make a few bucks and hit the bed with a smile on my face and a bigger bank account.
Speed
Nobody likes sitting in front of the computer for hours at a time. With scalping, I thought this was not going to be a problem since I would only be going after small moves. And how long could it take for the market to go 2-5 pips in my favor, right?
Basically, you want to get into the market, bank some quick profits and get out of the market.
Scalable Profits
If I could just jump in the markets any time to bank some profits, I thought the amount of money I could make was up to me. I could scale up my profits just by adding a few minutes or trading sessions. I thought the more I traded, the more money I could make.
My Experience With Scalping Trading Strategies
Scalping is HARD!
I quickly learned that scalping was much more difficult than it seems on the surface. Even though you are only going after small price moves, it can be very hard to get them. And the stress of being in the market going after those moves is very intense. Every tick of the market is important; the fluctuating profit and loss pushes the trader on an emotional roller-coaster. Even when I would win, sometimes I would kick myself for getting out of the market when the move went on for 50 pips or more.
I did not have what it takes to learn scalping on my own. So, I joined a trading room with someone who considered himself an “active” trader. This means they get into the market frequently and look for smaller profits. The trade room hours happened to be at 5 in the morning during the winter. I would get up in the cold darkness and hook up my computer in the living room to not disturb my wife. And then I would try to follow along with the trader.
It was HARD!
The trader would go so fast and watch so many different currency pairs at once, I could not keep up. Sometimes I would win and sometimes not. I learned quickly scalping was an art. You must know what you are doing to make it work. After about a month in the trade room, I was exhausted and with little to show for my efforts. Scalping was just not for me.
My Conclusions About Scalping Trading Strategies
Time Consuming
While you are only looking for small moves in the market, you need a scalping trading strategy that helps you identify the RIGHT time to get into the market. And, as fate would have, most of the time is NOT the right time to get into the market. This means waiting around, staring at the charts looking for the right time to pull the trigger.
The longer you wait for a new setup, the more likely you are invent the right setup. Boredom increases your need for action, so you start inventing entries that are not really there. The poor decisions result in losses, causing you to abandon your scalping strategy.
Extremely Stressful
While in theory you are in the market for only a short time, the time in the market is extremely stressful. Everything is more intense because you only need a few pips to be a winner. But sometimes, it is not that easy to get even that small amount of pips, or it could take a long time.
Imagine this… you have been waiting for over a hour for a setup when finally one comes. You pull the trigger and get into the market. Your heart starts racing.
To make things worse, you used a big lot size because you need to make enough money on only a few pips to make trading worth it. Immediately, price goes against you and you see a lot of money at risk. This scenario is frequent and very hard to accept emotionally.
Expensive
Since you are going after only a few pips of profit, spread becomes a big issue. If you are trading a currency pair with a 3 pips spread and you want 3 pips of profit, the market has to move 6 pips. And even if you win, you are paying half of the move to the broker. This is a very costly way to trade compared to trading on higher time frames where you look for 100, 200, 300 or more pip moves.
Potential For Large Losses
Due to random market moves, you need to place the stop a decent distance from price. Otherwise, any spike in price knocks you out of the trade. Your natural risk to reward ratio is lousy. The take profit is often a tiny fraction of the total risk.
Get stopped out often enough where a spike takes you out and then goes in your original trade direction and you’ll start doing one of two things. You’ll either widen your stop or start trading without a stop. In either case, you are setting yourself up for devastating losses that will negate many previous wins.
In the end, I proved to myself that scalping was not for me. The next logical progression was to move on to intraday trading strategies. Next time I’ll go over my experience with intraday trading strategies, tell you a strategy I like and how creating trade management robots really help.
If you have any experiences with scalping strategies you’d like to share, please leave a comment below.
Joe Perez says
I’ve been trading for around a year now, self taught. I’ve started wondering about scouting and thinking of giving it a goal. I’m a VERY small time invested, like 80$ a paycheck small. With that being said, I’ve made a “plan” and a goal. A goal of 20$ a week, profit. I say a week because it won’t force me to make DAY trades. So it’s like scalping with less risk. I won’t use a stop. So if the stock goes down, I’ll just keep until it pops back up. (Unless of course it goes WAY down)
I also figure, 20$ a week x 4 x12; will give me a DECENT PROFIT. (for my scale) Better than a savings account that only generates 30c a month. As my profit widens so will my investment amounts.
Shaun Overton says
That’s going to work until, one day, it fails catastrophically. You need to use a stop loss without exception.