Many traders want to be scalpers, but few know what scalping is or where to begin. There is really nothing to compare with scalping when it comes to excitement in trading, and contracts for difference are a great way to take part. This is not to say scalping as a trading strategy is easy, in fact scalping is hard to get at home, not impossible but hard. There are those who would argue that scalping is a trading style that is particularly suited to CFDs due to the greater flexibility and lower transaction costs of CFDs. However, this trading strategy is not for the faint of heart and you need to be on your game and alert to make consistent profits. When you are scalping with CFDs you have the advantage of leverage on your money, but you aren’t handicapped by having to pay financing interest as you don’t hold any positions overnight.
Scalping is a way of trading where you take small consistent profits, cutting your losses quickly when necessary. The scope of scalping is to take frequently gains from small price fluctuations and trades are often exited shortly after becoming profitable. You are head to head with other traders, as the gains you are looking to make have little to do with long-term fundamental trends and much to do with market fluctuations. Scalping can be misunderstood, mainly because there are many ways to achieve it, and not much information on actual methods.
A market scalper is considered anyone that looks to take advantage of small fluctuations in price, while trading one or more positions throughout a trading day. Normally, these positions are based around market volatility as momentum and prices fluctuate throughout a particular trading session. Scalpers look to enter the market, and preferably exit positions as quickly as possible.
Scalping allows for easy entry and exit and allows gains to be made in all market conditions. Opportunities for short term trades occur in all market periods and during varying levels of activity. The time frame for scalping trades is intraday and ideally within a few minutes which removes the overnight exposure and consequent risk of opening gaps. With the holding time for scalping trades being so short this trading style also reduces the possibility of substantial losses from adverse market movements. You are looking for small moves while controlling a large number of shares, and thus there are many more opportunities available for scalping than for swing trading, where you want a modest number of shares to have a decent sized move. The effectiveness of scalping derives from the fact that it is far easier to catch small price movements of a share such as $0.08 than it is to catch bigger less-frequent movements greater than $0.50.
The downside of scalping include the speed with which you’re forced to react, and the costs including the bid-offer spread which eat away at the modest price changes you are seeking. Scalping works best with a fast Internet connection and even a Level II screen giving direct market access.
CFDs allow you to leverage your money, so that you can take the large positions needed for scalping without such a big investment. As always, leverage can work against you, and you must be quick to cut your losses if the price moves the wrong way. As with all trading, you put the odds in your favor if you make most of your trades with the current overall trend.
A number of scalpers utilise technical analysis to plan their trades. CFD scalpers should have a clear idea when and why they wish to enter into a position. This does not mean a scalper completely forgets market fundamentals, but will ultimately plan their entry and exit around charting prices. An economic calendar which includes earnings releases for large companies along with fundamental news releases regarding a countries economic health may also be used to help determine when market volatility will increase for specific CFD shares, stock indices, commodities, and forex pairs.
What are some of the strategies that traders use for scalping? One of the ways to scalp is to look for established support and resistance levels, and trade off them. Once you have the levels defined, it is also easily see as soon as the price starts to break out, and you can trade with the breakout. Looking away from the charts for a moment, and keeping CNN on in the background, sometimes is possible to anticipate that breaking news will have an impact on the prices in the next few minutes, and it is precisely this type of price fluctuation which the scalper is looking for.
Large blue chip stocks can also represent good scalping opportunities. Traders utilise the leverage that CFDs provide to buy or sell large quantities of stock without having to outlay the full market exposure to profit from small price fluctuations. An instance of this would be to buy 10,000 share CFDs to sell for a 2 cents profit. Let’s assume that you buy 10,000 share CFDs at $5 which you then sell at $5.02. The .02 small movement translates into a $200 gain (excluding commissions). A number of trades would be entered several times throughout the day with small gains continually being taken.
Scalping trades can be executed on both long (buy) and short (sell) trades. If utilising this trading strategy it is very important that you are able to remain calm and be able to maintain your discipline. You also need to respect your own exit rule criteria and make sure that short-term trades do not become a longer term hold. The risk/reward ratio for scalpers is usually closer to the 1:1 level since trade sizes and exposure are often larger and smaller price movements are magnified by more frequent dealing translating into larger profits.
What Scalping is Not
There is a strong misconception that all scalpers are high frequency traders. So how many trades a day does it take to be considered a scalper? All high frequency traders are scalpers, but not all scalpers are high frequency traders. In order for you to qualify as a scalper you only need to take 1 position a day! That is one of the benefits of scalping CFD’s and currencies. You can trade as much or as little as you like within a given trading period.
This also falls in line with one of the benefits of the Forex market. Due to the variety of CFDs available trading is offered virtually around the clock. This means you can scalp the market at your convenience. Take advantage of the quiet Asia trading session, or the volatile New York /London overlap. Trade as much or as little as you like. As a scalper the choice is ultimately yours to make!
There are always risks associated with trading, but especially so when implementing a scalping strategy. A trade can move in your favor very quickly, but just as easily move against you. This is why short term traders area always working on perfecting their risk management skills. This way, in the worst case scenario, you always have a plan of action for limiting your losses and exiting the market as quickly as possible.
This brings up another misconception; scalpers are very aggressive traders that can be prone to large losses. One way to help combat taking unnecessary risk, is to make scalping an almost mechanical process. This means that all of your decisions regarding entries, exits, trade size, leverage and other factors should be written down and finalized before approaching the charts. Normally as a rule CFD scalpers normally risk 1% or less of their account balance on any one position taken!
Scalping is not recommended for the beginner, as you need to become comfortable and familiar with the actions of the market so that you can respond quickly and instinctively. When you are scalping you are pitted against seasoned traders, and may receive some hard lessons. But if action and excitement are what you are looking for, CFDs provide the instrument to benefit from scalping.