Scalping involves attempting to capture many small profits from frequent trades, often holding positions for just mere seconds or minutes.
It takes advantage of short-term price fluctuations in highly liquid instruments. Significant discipline, experience and precise execution are required given the short time frames involved.
Entry and Exit Signals
Scalpers study order flows, volume, time & sales data and order book depth of offer to identify reversals or continuation moves. Positions are entered using market or limit orders and held for only a few ticks in profit.
Popular indicators like VWAP, pivots and momentum oscillators provide additional confirmation. Strict profit targets and stops must be predefined.
Statistical Data on Scalping
Studies show scalping strategies work best with liquid forex pairs which see 150-300 pips of daily range. Pairs like EUR/USD, GBP/USD offer this. While equities may range 1-2%, fast moving coins see multiples higher.
Proper position sizing prevents being moved by frequent small losses which are inevitable. As from years of experience scalpers show winning percentages between 45-65% are realistic.
Managing Risk on Each Trade
Given winners are small, even a single large loss can wipe out several gains. Risk is strictly limited to 1-2% of account per trade with stops placed just outside observed supported/resistance zones.
Trailing stops as profits accrue prevent winners from reversing against positions. Partial closes lock in profits and reduce risk as trades progress favorably.
Position Sizing and Money Management
As with day trading, position sizes are standardized relative to account balance, usually 1-5 contracts or shares depending on volatility.
Leverage below 4:1 prevents maintenance margin calls. Strict risk controls are mandatory since frequency increases probability of drawdown. Scaling in/out of positions mitigates risks.
In summary, scalping is a high effort, high risk strategy requiring exacting discipline to succeed. Through liquidity, technical proficiency and sound risk practices, it can potentially generate respectable returns for experienced traders over time. But newbies are cautioned to avoid its challenges.
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