Scalping is the quickest way to make money when you are trading. Along with the quick money of scalping, however, comes the risk of losses at a greater magnitude. So, why is the quick money even for lower amounts the ideal strategy of some, like Shawn Lucas? And what are the actual associated risks of scalping in the FOREX market at a strategy over something longer term that could last weeks or longer in a trade?
When you look at the scalping strategy, you're placing a copious amount of trades, typically in a very short period of time. This type of trading lets traders catch all the pullbacks and reversals of the market without the risk of a longer term trader. Along with catching these movements, scalpers make higher profits than any other type of trader in slower times in the markets. The high to low range of 10 pips is a series of buys and sells to a scalper who generates 40+ pips while a longer term trader only made the 10. The fact that the trades are so quick and typically only shoot for a few pips, there is more trading to be done and more profits to be made.
This is exemplary in Shawn Lucas’ trading style. The take profits that are set by Shawn are typically in the 2 pip area. One thing that can be seen in this trading to account for that 2 pips is lot size variation and amount of trades. When watching scalpers trade, yes, they’re going for 2 or 3 pips, but they have 10 trades on and keep trading the duration of the movement. So, that 2 pip trade turned into 100 trades to capture 25 pips of movement. That may sound like a lot of work, but let's take a look at the numbers. Scalping with a 0.1 lot size creates 100 trades at the minilot, equating to roughly 10 lots capturing 20 pips. That movement generated a bit less than two grand after accounting for spread and trade commision. Let’s take that same 25 pip move, catch the whole thing with one trade using half a lot. That trade increases your account balance ~1,000. These numbers are rough and will change from person to person and strategy to strategy, but that’s the idea.
With all of the reward there, what risk comes into play? Since you're going for a minute amount of pips, you have to closely watch the other side of things. If you do not closely monitor the stop loss, a lot of trading can be quickly undone. One thing if you watch Shawn Lucas trade is with the 2 pip take profit, there is a 20 pip stop loss. With some scalpers, there won’t be a stop loss at all since they are monitoring the trade and can easily manually close the trade. But the reason for the 20 pip stop loss isn’t to close the trades, that should usually be done manually with a scalping strategy. The purpose, however, is to catch movements that aren’t expected per se. If the market takes a quick and sudden nose dive, the stop loss, which is likely more than you’d like to lose, is there in case you cannot close out in time. It's a safety measure and not much more. Looking at the safety measure though, it becomes apparent that if for whatever reason, the trader becomes unable to quickly manually close a loss, the whole days profits can easily be returned to the markets.
So in the end, scalping is a quick series of trades. These quick trades make a lot of mini profits to create an end all large sum of money to bank in your account. Scalping is a system requiring patience and focus at times and great speed during others. It's a highly rewarding trading style that can become quite risky during certain market conditions. If scalping is a strategy you would like to learn more on, Shawn Lucas’ FOMC trading videos on the Apiary Fund YouTube page are a great resource to learn. Know the requirements and the reservations that need to be taken with scalping, however, as it can be just as detrimental as profitable if you're not prepared.