This article is part of our guide on how to use scalping techniques to trade forex. If you haven’t already we recommend you read the first part of our series on forex scalping.
Scalping in two different ways
It is possible to think of scalping in two different ways. In one approach, the trader is concerned purely with the slow price fluctuations that occur in a short period of time, and uses technical methods to trade them. In the other approach the scalper can also be a trend follower, or a swing trader, but he uses very small, fast trades as a rule. The latter approach tells the trader to exploit rapid and sharp price movements, while maintaining an eye on the overall market direction in order to control risk exposure. The first approach, on the other hand, requires that the trader benefit from slow, and small price movements which go nowhere: while the price is moving slowly up and down, it will generally return to where it left, and it is possible to trade it without taking great risks.
In this section we’ll take a look at both approaches. We’ll discuss the pure scalping approach in the context of ranging markets where volatility is the main method for generating profits. We’ll also examine the combined approach while studying the subject of scalping with the Fibonacci extensions in trending markets. Let’s note here that technical strategies that can be applied in day, or swing trading are equally valid in scalping as well, and that there’s no difference (apart from the role of the spread) between a 5-minute or 5-month chart as far as analysis is concerned. The reader is invited to read about technical indicators and strategies here.
Psychology and scalping
Before going on further and discussing the details of the subject, however, we wish to say a few words on the psychological aspect of scalping. As we mentioned before, scalping is an emotionally intense activity where the trader must keep calm nerves in the face all kinds of unexpected events. Clearly, overcoming these issues and maintaining a consistent and disciplined approach to trading is a precondition to achieving any kind of profit in the forex market. So how does the trader achieve this necessary degree of emotional restraint and composure?
People remain calm and composed in conditions with which they are familiar and knowledgeable about. Most of us are disturbed if a car makes a sudden movement, but are not bothered while an airplane is taking off with great momentum and speed. Similarly, the same person can perceive anxiety by a small unexpected cut on a finger, yet feel relatively composed while heading to the hospital in order to be operated on by a surgeon. In other words, our emotional responses to risky activities and disturbing conditions are not entirely dependent on the nature of what is being experienced, but more on what is being perceived by us.
Minimize unnecessary risk
As such, in order to be successful a scalper must accustom himself to market conditions in such a way that losses and profits in the markets are expected and acceptable. We need to convince ourselves, and teach that there is no danger, so that we can trade with confidence. Needless to say, if there are real causes for concern, fear is appropriate. If we are risking more than we should, taking too much leverage, or don’t know what we are doing, we’ll feel nervous, timid, and insecure about our trading decisions. In that case, the first step is ensuring that we are not taking unnecessary risks. It is difficult for scared money to profit, and even more so in scalping, therefore, we need eliminate the logical causes of fear from our practice.
Start with small sums
If after removing such causes we still feel nervous and worried about what we are doing, it is necessary to take additional steps to deal with the causes of our irrational perceptions. These steps should involve the automation of our tactics. The suggestion for scalpers is to begin this learning process with very small sums which are then increased and combined as experience allows greater, healthier returns. Since at the earliest stages the purpose is not to make profits, but gaining experience, small accounts with minimal leverage are necessary. There is very little point in worrying about a small loss if by realizing it we are gaining important lessons about what should and should not be done in the markets. By being accustomed to difficult market conditions which accompany scalping in the markets, we can prepare ourselves for the ultimate challenge of trading significant sums in the forex market. As we like to say, no body can leap to the top of a mountain or a skyscraper, but by climbing on rocks, or using the stairs many people are capable of realizing such an seemingly impossible deed.
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