Scalping in forex is a trading method, where trader looks to exploit small fluctuations of the price. Scalper will typically look for profit in range of few pips. To make this worthwhile, he will typically use higher leverage and trade frequently.
Scalping is exciting trading method, that can produce steady profits when employed correctly. However it is also extremely demanding and there are few drawbacks that should be considered by every aspiring scalper.
Scalping in Forex: disadvantages
High trading costs
Scalping requires frequent trading almost by definition. Frequent trading also means frequent and substantial position entry costs. When looking for profit within few pip range, target may even equal entry cost. In other words, trader will make one pip trading and pay one pip for trading. Small difference in spread between the excellent broker and good broker may be the difference between consistently winning strategy and consistently losing strategy.
Solution: Pick the excellent ECN broker with narrow interbank spreads. When trading high volume some brokers will be able to return portion of your trading costs each month. DARWINEX meets both those conditions. It is therefore broker of our choice for scalping.
Use scalping expert advisor with strict spread filter. Tight spread filter is crucial when trading scalping forex strategy. When looking for small profit trader should not get involved during the high spread market conditions. Most of our scalping expert advisor are equipped with spread filter that will help you avoid those conditions.
Constant focus and time requirements
Scalping manually is a full time job that requires sitting in front of the chart. There is no room to watch funny cat videos on youtube while scalping (as it is with other trading styles). Constant focus is demanding and scalper often face burnout. Human factor also comes in play. Tired trader will often make very expensive mistakes. Margin for error is very small when you trade with high leverage while looking for small profit.
Solution: Most reasonable traders will use scalping expert advisor to automate trading. There are no drawbacks. You still get the excitement as you can observe expert trade. However it will not make trades outside rules, get greedy or tired. It can make complex split second decisions and trade relentlessly 24/5.
Scalping can turn to gambling Scalping can easily turn to gambling. Excited trader on the winning streak will abandon all of his own rules in pursuit of fast money. If it happens once, it can easily happen again. Being impulsive is one of the most undesirable traits for forex scalping.
Know yourself. If you have tendency to gamble (trade impulsive) avoid scalping in order to make money trading forex. Instead pick some conservative trading system and make it a little boring. Try to improve your discipline and self control before attempting scalping again.
Use expert advisor.Scalping expert advisor will remove some of the temptations to open random trade. However some traders will be inclined to tamper with EA inputs, in order to make it more aggressive. Changing the rules on the fly is a huge red flag, and can be also considered to be a subtle form of gambling. Any change of the rules should take days and weeks of backtesting and data analysis.
Scalping is more vulnerable to unexpected market events.
Being always in trade also means that you are more vulnerable to sudden news that could create price gap in the market. You position could end up in loss far beyond your stop loss levels. When using high leverage this events can become destructive for majority of trading accounts.
Solution: Trae only most liquid markets and major currency pairs: Those are less likely to lack liquidity necessary to close your trade. Major currency pairs are also less likely to move as suddenly, compared to less liquid pairs.
Stay in the game long enough: When you scalp long enough, chances are that expected market moves will catch in both sides, positive and negative.
Trade with trusted broker: Unexpected market events will are better survived with good broker that will not hunt for your position stop loss.
Limit the use of leverage: Use only as much leverage as you need. Never overexpose your accounts margin capacity. Make sure you can take unexpected market events without margin call and even wait for price equilibrium to occur.
Unfavourable risk reward ratio
Scalping is one of those trading methods that are often performed with unfavourable risk reward ratio. Trader will often risk 100 pips just for the possibility of gaining 1. Market provides plenty of opportunity to enter high probability setups that can make this reward sustainable. Unfortunately this trading style also means that days and weeks of profit can be wiped out with relative ease. Few bad trades in a row can therefore produce substantial loss.
Solution: Even in systems with negative risk reward ratio, look to improve it. Strategy with RRR 50:1 is still much better than 100: strategy. When modifying risk reward ratio, make sure to not decrease ratio of winning trades too much.