In this article, you’ll learn about scalping, and how it’s different to other styles of trading like day trading. We’ll also answer the question “Is scalping trading illegal in Australia?”
Let’s take a closer look at scalping and learn what is scalping in trading.
What is Scalping in Trading?
Scalping trading is a sharp in-and-out trading style. Scalping focuses on profiting from small changes in price. Even the smallest unit of price movement available to your given market whether that be a cent, tick, pip etc.
In day trading, a scalper will take advantage of high volume creating fast price action. The quick-moving price action allows a trader to enter and exit the trade in as little as minutes, or even seconds.
A day trading scalping strategy suits highly volatile markets. Because of this, it’s important to time trades well. Even more important is the exit strategy and risk management. If the market moves against the trader too much, the scalping trade can wipe out prior winning trades.
Is Scalping Trading Illegal In Australia?
Scalping trading is legal in Australia and allowed by most brokers. Some brokers may not provide scalping trades due to the number of executions over a short period of time.
Though scalp trading is not illegal, some brokers consider this form of trading to be too risky. Scalp trading can be risky to any trader unable to time trades. The trader must understand the correct risk management techniques for the trading style.
Scalping Trading Strategy
Every scalping strategy must focus first on risk management. It is important to keep losing trades small. This is one of the most important things we teach people when they learn to trade.
Scalping differs from day trading and swing trading strategies, you need a high success rate to remain profitable. Other forms of trading may remain profitable at a 60% win rate. A scalping trading strategy needs a higher win/loss ratio.
It’s also important for a scalp trader to keep winning trades equal to or larger than losing trades. This will put less strain on the win/loss percentage requirements.
A scalper should look to place at least 10 scalping trades per day to take advantage of small price moves. Your scalping strategy requires strict rules to ensure you minimise losses.
5 minute scalping strategy
Most scalping strategies take advantage of day trading indicators. As do day and swing traders, but they also look at chart patterns. It’s useful to understand some trading patterns to identify support and resistance levels. But indicators can take a lot of the technical analysis out of scalp trading.
A popular form of scalping in trading is to trade off momentum. With momentum in the market, it’s implied there’s potential for price to continue, and possibly accelerate.
A scalping strategy may use 2 indicators to speculate direction of price action. The 20 EMA (Exponential Moving Average) and the MACD (Moving Average Convergence Divergence). Using these indicators, a scalper can identify potential entry and exit points.
The 5 minute scalping strategy uses these indicators on a 5 minute chart. This is to identify short-term momentum swings. But, it is important to note that this strategy may not be suitable for all traders and market conditions.
What is the 20 EMA?
The EMA is a calculation that determines the average of a set number of prices.
An EMA assigns more weight to recent price changes than a simple moving average (SMA). The SMA applies an equal weight to all price changes.
This means the EMA is more responsive to recent market movements. Thus the EMA can give a more accurate representation of current market trends than the SMA.
Using the EMA a trader can identify trends and potential entry or exit points for trades.
What is MACD?
MACD is a technical indicator used in scalping to indicate changes in market trends.
To calculate the MACD, take the 12-day EMA and subtract the 26-day EMA. A 9-day EMA of the MACD is then calculated, which is the ‘signal line’.
If the MACD line moves above the signal line, it’s considered to be a bullish signal. This implies that the asset price may soon experience an upward trend.
When the MACD line crosses below the signal line, it’s considered a bearish signal. This suggests that price may head in a downward direction.
Another use for the MACD is to display the divergence between indicator and the price of the market. This can be a signal of a reversal in trend.
Which is the best scalping moving average?
The moving average is the most widely used set of trend-following indicators. Moving averages smooths price data by calculating the average price over a given period. But, the question remains, which is the best moving average for scalping?
The answer to this question depends on the trader’s preference and trading style. Some traders prefer SMA due to its ease of use and straightforward calculation. Others favour EMA because it gives more weight to recent price movements, making it more sensitive to short-term changes in the market.
The SMA gives equal weight to all prices over the specified period. The EMA gives more weight to recent prices. So which is the best moving average for scalping? The indicator that suits the trader’s trading style, and provides accurate signals.
It’s important to note that no indicator is perfect. A scalping strategy should use a combination of indicators to increase probability.
Will a Scalping Strategy Work in all Markets?
While a scalping strategy can be profitable, it’s not suitable for all markets. The success of a scalping strategy depends on liquidity of the market, volatility, and the bid-ask spread.
Scalping is more effective in liquid markets such as Forex and Futures. This is because price movements are frequent and significant. It may not suit less liquid markets like stocks, where the bid-ask spread can be wider, and there’s less price movement.
Scalping takes a lot of concentration. A trader needs to make decisions quickly in order to get in and out at the right times.
Before considering a scalping strategy, first evaluate the market conditions. Decide whether you have the skills required, to determine if it is a suitable strategy.
Scalping Trading Conclusion
Scalping is a popular trading strategy used by some traders to make quick and easy profits. Make sure to learn all you can about scalping before you try it out. You may choose to consider taking one of our trading courses for beginners.
Some countries have laws and regulations on scalping trading. In Australia, scalping trading is not illegal. But, traders must adhere to strict guidelines set by the Australian Securities and Investments Commission (ASIC).
In conclusion, scalping trading can be profitable for experienced traders. Scalping requires discipline, and focus, which beginner traders may not have yet.
As with any investment strategy, traders should research before implementing a scalping strategy.
Join us for our next free trading workshop to learn more about our scalping trading strategy.
Scalping trading regulations vary from country to country. In some countries, scalping is illegal, in others, it’s allowed with certain restrictions. For example, in the United States, the SEC has a PDT rule. This rule prohibits traders from making more than four round-trip trades within five business days if their account has less than $25,000.
In Canada, scalping is legal but regulated by the Investment Industry Regulatory Organization of Canada. Traders must comply with specific rules governing short-term trading strategies.
Research and understand the laws and regulations in your country of residence before taking up scalping.
Scalping trades involve buying and selling within seconds or minutes to make small profits multiple times a day. While this strategy can be risky, it has several pros for traders.
Here are some of the pros of scalping trading:
Scalping trades provide a high-frequency of trades. This allows traders to capitalize on small market movements.
Scalping trades require minimal exposure to the market, reducing the risk of significant losses.
Scalping trades can be executed on many instruments, including currencies, stocks, and commodities.
Scalping trades can be profitable even in flat markets, as traders can use leverage to increase profits. However, scalping trades require discipline, patience, and a sound understanding of market trends.
Traders should have a reliable trading platform and access to up-to-date market information. If executed correctly, a scalping strategy can be a profitable f
or experienced traders.
Scalping trades are a popular approach to trading in the financial markets, especially among day traders. While scalping can yield profits in a short amount of time, there are also some cons to consider.
One of the biggest drawbacks of scalping is the high level of risk involved. Due to the short time frame of these trades, prices can fluctuate rapidly and unpredictably, leading to sudden losses.
Additionally, scalping can be stressful and time-consuming, requiring constant attention to market fluctuations. Another con of scalping is the potential for high transaction costs, such as commissions and fees, which can eat into profits.
So, traders need to weigh the pros and cons before using scalping as a trading strategy. You should have a solid understanding of the risks involved before trading.
For scalp trading, traders typically use short time frames, such as 1-minute or 5-minute charts. These time frames allow for quick analysis and decision-making; essential for scalp trading.
It’s important to note, these time frames come with higher risks due to their volatility and noise.
If you’re new to scalp trading, it’s recommended to start with longer time frames, such as 15-minute or 30-minute charts. This will help you get a better understanding of the market and develop your trading skills.
As you gain experience, you can reduce the time frame and increase your potential profitability. The time frame you choose for scalp trading should align with your trading style, risk tolerance, and overall goals.