The reason many of us get into Forex Trading is because of the ability to use leverage to enhance potential profits. While the general use of leverage increases the potential rewards, it can also increase the potential risks.
I have traded across all the time-frames throughout my trading career. In my opinion the use of leverage is greatly diminished the higher the time-frame you trade, and therefore the potential rewards are also greatly diminished. But does this mean that your risks are also reduced?
Is Scalping Risky vs Higher Time-Frames?
There are many people within the industry that are adamant that scalping is extremely risky and near impossible to do. Many of these people make comparisons to the trading on the higher time-frames, making it seem like the only way to trade with low risk and higher certainty is by trading the daily or 4 hour charts.
In my opinion there are several reasons as to why short term/scalping trading has been branded as high risk compared to higher time-frame trading and they all come from those that have failed at scalping:
- Because new traders with $ signs in their eyes, who have no self control, or no trading plan, go on a gambling spree on the lower time-frames, getting chopped up and down, then murder their accounts. We’ve all heard the stories.
- People use lagging indicators instead of price action to determine entries on the lower time frames and end up getting into movements halfway through, therefore getting stopped out by the whipsaw nature of the market.
- People who’s personality does not suit a scalping style of trading force themselves to scalp
- People use too many indicators and have extremely complex decision making processes for entering the market.
- People do not have the psychology or presence to deal with the whipsaw nature of scalping. Many traders are biased to picking one direction and find it difficult to switch from long to short and back again.
- People over leverage their accounts.
- People don’t give themselves enough training and practice over time to develop a relationship with the market and understand how it flows.
If you know what you are doing, have a good trading plan and have the self-control (presence in your trading) then you can dominate the lower time-frames with less stress, less exposure and potentially greater rewards.
In my opinion it is less risky for me to trade the 5 or 2 min chart with a very tight stop, get in and get out, realise my losses and profits in a short time-frame and have the opportunity to make multiple trades a day. More trading opportunities means that you are putting your capital to work more often. Compare this to taking 4 or 5 trades over a week on the higher charts with huge stops, yet risking the same amount per trade.
If you are trading the higher time-frames you are investing not trading. Trading the daily or 4 hour charts and holding trades for days means you are exposed to the many variables that drive the market: news, politics, natural disasters etc etc. Your risk capital is tied up in the market for days at a time.
There is no doubt that scalping can be risky and is not for everyone. There are definitely more opportunities to make mistakes and the choppiness of the lower charts can be difficult to deal with psychologically. Like trading on any time-frame, you have to know what you are doing. You have to be able to read price action as price action allows you to trade with the flow of the market. You need consistency of discipline and patience (presence) in your trading and you need to put in the time and energy to learn. Learning to scalp is like learning anything else, it just takes time and patience, it’s not impossible like people make it out to be.
Scalping 2 Minute Chart
Below is a 2 minute chart for the EURJPY European session from the 29th August 2013. Click the chart to enlarge.
I will highlight the price action set-ups and discuss the potential for returns and the risks associated. Hopefully you will see that there are opportunities to scalp with managed risk and good rewards.
Click Chart to Enlarge
A Small trendline is developing, lower highs and lower lows forming, moving averages have rolled over signalling short term momentum is changing. Price forms a small rejection candle off the moving averages and trendline, price has also reacted several times at this area in the last 15 candles. Entry on the close of this candle and stop above (approx 4 pip cost with commission). There is the opportunity to take 2R out of a trade like this.
Tips: When scalping the 2 minute chart your intuition comes into play as execution needs to be quick and efficient. Using a fixed stop loss of, for example 5-7 pips, for all trades allows for one-click trading, consistent lot size and risk per trade.
Price forms a flat bottom with 4 attempts to break lower without success. Price then forms two inside doji candles in a row. Entry on the close of the second one, stop loss of 5 pips, 1:2 risk to reward achieved on the next candle.
Tip: Given the strength of the momentum drive back up you can look to hold onto the position with a wide take profit. Many times at the start of the session you can get in at the ground floor and ride the move for significant value so long as the momentum holds.
Price is slowing down and reacting multiple times, price then breaks through this level and rejects back down, then forms another red rejection candle. Entry off either one of the two, stop loss 5 pips, price runs back down to the previous area of resistance from earlier on in the session and makes a 50% retracement of the move up. Potential for 1:2 risk to reward on this trade.
Rejecting off the previous area of resistance and 50% retracement of the last move up, also off the 50 EMA and in the direction of the short term trend. Entry on close, 5 pip stop, 1:2 risk to reward potential.
Price has tried to go higher multiple times but has failed and formed a trendline. Price rejects off the trendline with moving averages coming back together and closes well down the previous candle. Entry on the close, stop 5 pips, take profit potential 20 pips.
Price drops back down to form a double bottom from earlier in the session and reacts strongly off this area. Entry on the close, stop 5 pips, 1:2 risk to reward possible.
Have you ever tried scalping? What have been your experiences? Please use the comments section at the bottom of this page.