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Scalping is an immensely popular trading strategy that concentrates on opening and closing short trades within seconds or minutes over a longer period. The basic premise of scalping is to identify a trend in the market, enter a trade, wait for the short move, and exit the market with a profit or a loss. Scalping techniques are highly time sensitive, as most scalp trades are over within mere seconds or minutes. Of course, the consistency of the results depends on the accuracy of the trade and the magnitude of movement. While most scalpers look to make small gains consistently, other traders use scalping to make huge profits within a matter of seconds by trading significant news events.
Is Scalping Always Profitable?
In reality, scalping is a high-risk strategy that has a higher probability of losing than winning. Scalping has shown to provide consistently positive results over a short period, but over a longer duration, scalping loses out to other traditional trading strategies. Scalping is a strategy that depends heavily on the psychology of the trader, and emotional decisions can interfere with the success of a scalping strategy.
On the contrary, several traders have found success with scalping by being able to control their emotions and trading the markets according to the prevailing trends. Disciplined traders do find success with short-term trades by being able to master the market conditions and by actually responding to the market without succumbing to their gambling mentality.
What Are The Requirements For Scalping
As a high-risk, short-term strategy, scalping requires a trader to sign up with a good partnering broker that does not limit the amount of trading freedom. Several brokers inhibit scalping, even if scalpers tend to pay well than regular long-term traders. The basic premise behind scalping is that most scalpers enter the market for a very short amount of profit. There are instances where traders are known to scalp for as low as 1 pip. By placing 100 small trades, a trader can eventually achieve 100 pips a day by making an educated guess.
Scalping strategies hurt brokers that follow the market maker model, also known as a dealing desk, whereby brokers are essentially taking the opposite side of their trader’s position. Brokers that offer micro accounts are usually market makers that do not connect a trader to the global liquidity pool. Instead, market maker brokers take the opposite side of a trader’s position, and they win when their traders lose. Therefore, if a trader is consistently placing winning trades over the course of a day, the broker is bound to lose quite a chunk of money, which can affect their bottom line. It can also be difficult for a dealing desk broker to match scalping trades quickly on to other traders, as it will be difficult to fill open and close orders within the matter of seconds or minutes if there is limited liquidity in the market.
ECN and STP brokers, on the other hand, are not market makers, as they pass the trades directly to a liquidity provider. Therefore, there is no conflict of interest between the broker and its client, as trades are carried out without a dealing desk. In this type of brokerage model, the broker earns money through spreads and commissions, which allows traders to scalp the markets without any limitations. Therefore, the priority for a scalper is to choose a broker that allows scalping, preferably an ECN or STP broker.
Another important aspect of scalping is the cost of trading, which includes the spreads and commission. Scalpers are usually in the market for minuscule profits, which can be as low as 1 pip. Consequently, there are very few scalpers that are invested in the market for large movements, which requires the trader to be highly aware of the spreads on the currency pair of their choice. Major currency pairs such as the EUR/USD and USD/JPY have spreads ranging from 1 to 3 pips for regular STP accounts, while ECN accounts may offer as little as 0 pip spread. Hence, if a trader expects to make consistent profits, they should make sure that they should close a trade after considering the spread in each trade.
ECN accounts can help in reducing the spreads to a certain extent, but scalpers will have to account for the commissions associated with an ECN account. Although small market changes can take care of the ultra-competitive spreads available on an ECN account, the trader will still be at a loss due to the commission charged at the beginning of the trade. DMA, STP, and ECN accounts do have the edge over micro or market maker accounts for scalping, but it is vital for traders to be highly vigilant about the cost of trading before putting their scalping strategies to the test.
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A majority of mainstream brokers support scalping on their non-dealing desk accounts; however, brokers are also vocal about scalping limitations on their market maker accounts. For example, several brokers enforce a minimum ‘one-minute rule’ or a ‘trade closing rule’ of not less than 10 pips away from the strike price. While some brokers actively monitor this regulation, most FX companies take it a step further by actually freezing client positions to disallow traders from modifying their positions for a given period.
As a scalper, you should have complete freedom over your investments and your trading account, which requires you to choose a broker that allows scalping without any terms and conditions attached. In hindsight, a non-dealing desk model is preferable for both brokers as well as traders, since there is not a conflict of interest between the two parties, and both get what they want. A scalper can help a broker to achieve better revenue due to the higher trading volume, and the scalper has the freedom to enter and exit trades at his convenience.
If a broker is not transparent with their policies on scalping, you should always confirm whether scalping is allowed by a broker through direct means. Sometimes, brokers are often found to ban accounts that are accused of scalping permanently and are even known to hold on to the deposited funds. Therefore, it is always a good idea to get in touch with the customer service department to validate whether the broker indeed entertains scalping and to ensure that your funds are safe from any other policies that relate to scalping. You should also carefully read through the trading terms and conditions to ensure that your trading strategies are not listed as offensive or illegal according to the broker’s policies, which can certainly help you to guarantee the safety of your trading capital against broker scams.