If you prefer to trade in the short-term, by opening and closing multiple positions within a single day - then scalping might be of interest to you.
Want to jump into scalping trading? With this popular strategy, your goal is to make modest profits from several small trades. Although this might sound easy, scalping trading is also one of the most challenging strategies to master.
In this Scalping Trading Australia Guide, we introduce you to the basics of this strategy - covering its many benefits and risks.
We also cover some advanced techniques that you can use to increase your odds of success when employing the scalping method to your online trades.
What is Scalping Trading Australia?
The scalping trading strategy is used by traders that attempt to profit from small price movements in the market. They do this by placing multiple trades throughout the day - with the hope of making modest profit margins.
The idea of scalping is based on the assumption that once an asset starts moving in the market, it is likely to complete the first phase of the initial price movement.
From that point, it is not always possible to accurately predict the direction of the said movement. That is to say, some assets might continue to rise in value, whereas others might drop.
As such, scalping traders do not presume that a price movement will remain in play for prolonged periods.
Therefore, instead of capitalizing on an entire price movement, scalpers choose to trade only the strong initial action. In doing so, they limit the profit potential as well as the risk.
However, in order to make up for these modest profits, a scalping trader opens several positions over the course of a single trading day. To end the day in profit - you should have closed more winning positions than losing ones.
Example of Scalping Trading
For newbies, the concept of scalping trading can be somewhat testing to fully comprehend.
To clear the mist, here we have an example to demonstrate how scalping trading Australia works in practice:
- Let's say that the forex pair AUD/USD is currently priced at 0.7614.
- Upon reviewing the charts, you expect that the price of AUD is likely to go up in the next few minutes.
- Hence - you create a $1,000 order to open your long position.
- You set a take-profit order at 0.7620 - this translates to an increase of 6 pips or 0.08%.
- You also create a stop-loss order to limit your losses at 0.7610.
This scalping trade could lead to two scenarios:
- The price of AUD/USD increases to 0.7650 - at this point, your take-profit order will be activated, and you make a profit of 6 pips.
- The price of AUD/USD falls to 0.7610 - your stop-loss order will get triggered, and you will be left with a loss of 4 pips.
As evident from this example, scalpers are mainly concerned with making really small gains.
Although this might seem like an extremely small amount of profit to target - it is important to note that a scalping trader would be repeating such small trades for dozens or even hundreds of times during a single trading day.
On the other hand, if the trade is unsuccessful, the loss will also be limited to a modest amount. This makes scalping trading one of the lowest-risk strategies to opt for.
However, scalping trading can also be highly remanding. For one, you need to be constantly watching the market to follow price movements. In addition, you also need meticulous timing and swift execution to make sure that you do not miss out on any trading opportunities.
If not careful, what started as a profitable trade could easily turn into a loss.
For this reason, it is necessary that you have solid knowledge of the market as well as the different trading orders that you have at your disposal. Most importantly, you should be able to clearly define entry and exit strategies while scalping - as this is crucial to mitigate the risks.
Using the right set of orders will avoid the need for you to watch over every trade you execute manually. In other words, even if the market goes against your speculation - you will have control over your position and be able to keep losses in check.
As such, scalping trading Australia is one of the most intensive trading strategies. Therefore, this approach is most commonly preferred by seasoned traders who are well-versed with the intricacies of a volatile market.
Best Assets for Scalping Trading Australia
The scalping trading method can be applied to just about any asset class. That said, there are a few financial instruments that are particularly suited for this strategy.
Here are a few common characteristics among assets that are preferred by scalping traders in Australia:
A highly volatile market translates to relatively smaller price fluctuations. This makes it possible for scalping traders to find more trading opportunities.
Scalping traders seek out markets that offer the most liquidity. This allows them to enter and exit positions repeatedly without making any serious adverse impact.
Moreover, liquid markets can also get you tighter spreads - meaning, you will be able to keep most of your profits to yourself. With that said, it is important to note that - even if the market is open 24/7, some assets have high liquidity only during a specific time frame.
For example, the London Stock Exchange opens for trading at 8.00 am GMT. By 2.30 pm the same day, the New York Stock Exchange starts trading - adding more volume. If more than one financial market is open simultaneously, this will result in high trading activity.
If you are interested in alternative trading markets - cryptocurrency is also a viable option for scalpers. However, bear in mind that only a few digital coins such as Bitcoin and Ethereum benefit from high liquidity. A majority of crypto assets still trade in low volumes.
It is also possible to employ scalping strategies when trading with options and futures. However, they also tend to carry more risk - as these derivatives are heavily leveraged.
In summary - choosing the right asset can have a tremendous impact on the outcome of your scalping strategy.
What are the Requirements of Scalping Trading Australia?
Scalping trading requires lighting fast execution. In addition to your choice of assets, there are a few other aspects that can determine the success of your trades.
Zero Trading Commission
If you didn't know this already - trading commissions are variable fees you are liable to pay to your online broker for executing trades on your behalf.
Scalpers place hundreds of trades every single day. Imagine getting charged a commission on all those trades. By the time the market closes, all your profits will be eaten by the transaction costs.
Therefore, you want to look for online brokers that allow you to trade on a zero commission basis on your chosen market.
Here we have created an example to explain this further:
- Let's suppose that your chosen online broker charges you a commission of 1% per trade.
- Meaning, you will have to pay 1% in commission once when you open a trade and again when you exit it.
- Now, let's suppose that you place a $500 buy order on an asset.
- Using a scalping strategy, your profit target is 0.5%.
- This amounts to a profit of $2.5.
However, you will also have to consider the trading commission when calculating your potential profit.
At a 1% commission rate, you will be essentially closing the position with a net loss - even if you manage to make the aforementioned profit.
The spread is another fee that is of high importance to scalping traders. It is measured as the difference between the buy and sell prices of an asset.
As we mentioned earlier, for your scalping trades to be profitable, you should use an online broker that offers spreads as tight as possible. The wider the gap, the more you will have to make in profit just to break even.
Assets with high trading volume can also benefit from high liquidity levels. In other words - this means that there is enough money being exchanged on the market to open and close positions with ease.
Since scalping traders choose to enter and exit the market hundreds of times a day, it is important that you trade assets that deal with large trading volumes.
We are talking about the likes of major forex pairs, commodities such as gold and oil, and even some blue-chip stocks.
Furthermore, it would also be wise that you limit your scalping trades to standard market hours - because this is when trading volumes are at their highest.
Use Limit Orders
For those unaware, there are two ways for you to open a trading position- using a 'market order' or a 'limit order.'
A market order instructs your broker to execute the position immediately. However, this often leads to 'slippage' - meaning the execution price could be different from the market price by a very small margin. Normally, this small deviance will not affect your profitability, as you are aiming for high profits.
But when scalping trading, this slippage could be your worst enemy - making the entire strategy unfeasible.
Instead, scalpers should always stick to limit orders. This is when you specify the exact price at which you want your order to be executed. In this case, the broker will execute your order only if your predefined limit order price is triggered. If not - the order will remain pending until you manually cancel it.
Access to Leverage
Leverage allows you to increase the profits generated from trade.
For instance, let's say that you apply leverage of 1:10 on a $1,000 buy order on Facebook stocks. This would bring up the total value of your stake to $10,000. So, if you make a profit in this trade - it will also be amplified by 10x.
Typically, leveraging is an approach not recommended for beginner traders. The only exception to this might be the scalping trading strategy.
After all, a gain of 0.1-0.2% will not amount to much if you are staking small amounts. But with leverage, even the profit of a few pips at a time can add up by the end of the day.
Of course, there is no need for you to resort to leverage if your trades are backed with sufficient bankroll.
Additionally, leveraging can also invite higher risks to your trades. As such, you have to be extremely careful and employ the right risk management tools in order to protect your capital.
Best Scalping Trading Australia Strategies
Although scalping is a trading strategy by itself, there are some techniques employed by professional traders to increase their profit potential when using this system.
Scalping Trading Using Moving Averages
The moving average is a straightforward technical indicator used primarily by short-term traders. The tool is useful in determining the support and resistance levels of an asset - by predicting its trend direction.
In order to calculate the moving average, you can specify any time frame you want. Scalp traders typically choose to use smaller time periods - in terms of minutes rather than days. This is because a shorter time span can point out the more sensitive price movements in the market.
On the other hand, a longer time frame can help you understand the general direction of the trend.
- For instance, you can set a 200-minute time frame of an asset - this will point to the direction of the trend.
- At the same time, you also take two shorter time frames - let's say, for 5 and 20 minutes.
- When the longer moving average is rising - you want to look for the 5-minute average to cross the 20-minute average.
- If it does - it means that the asset is on a powerful bullish price trend.
- When this happens, you take long positions on your chosen asset.
As long as the 5-minute moving average stays above the 20-minute, you can keep opening scalping trades - targeting small price movements.
Ideally, you want to exit the trade before the 5-minute MA moves back below the 20-minute MA - as this represents that a price reversal is about to happen.
Alternatively, if the longer moving average is declining, you look for the 5-minute average to cross below the 20-minute average. This means you can take active positions on the trade.
Scalping Trading Using Consolidation Periods
If you are only getting started with scalping trading, the consolidation strategy might be more to your liking. In this approach, you are only looking to find out if an asset is trading within a tight range - otherwise called a consolidation period.
- Let us say that Tesla stocks have been trading between the range of $668 and $670 for a couple of days.
- Meaning - the price of Tesla shares has not moved above $670 or below $668.
- This indicates a price range of 0.30%.
In the eyes of a professional scalping trader, this presents an ideal opportunity to open positions targeting small margins. You can repeatedly place trades falling within this range until Tesla stocks break out of this said consolidation period.
- You can set a buy order just above the bottom price range of $668, or
- You can place a sell order just below the upper price range of $670
Provided that the stocks continue to stay within this range, it is ideal for a scalping trader to open and close more positions.
That being said, it is also crucial that you have a proper exit strategy to minimize the risks in case the stock quickly moves out of the consolidation period. This can be done by placing stop-loss orders - positioning them just above the upper and below bottom price range.
Scalping Trading Using Parabolic SAR
The parabolic SAR is another technical indicator that can point out the price direction of an asset. Put otherwise, this method can help you speculate whether a bullish or bearish trend is about to occur and when it is likely to reverse.
- This tool uses dots to represent the analysis.
- If the dots are above the current price bar, then it indicates that there is a BUY signal or an upward trend.
- On the other hand, if the dot is below the current price level - then it means a SELL signal or a bearish trend.
Scalping traders will open positions as soon as the parabolic SAR shifts from one position to another. You should close your trades when the price momentum starts to fade.
Scalping Trading Using Low-Risk and High-Reward Ratios
Another popular scalping trading strategy used by beginners and professionals alike is to rely on a low-risk, high-reward ratio. As you can imagine, in this method, you are aiming to achieve high profits by risking only low amounts.
This can be achieved by placing stop-loss and take-profit orders in a systematic manner.
Let us explain with an example:
- Let us suppose that you want to use a scalping strategy to trade gold - which is currently priced at $1,355.40 per ounce.
- You create a limit order to enter the market at $1,355.45.
- You create a take-profit order at $1,355.75.
- To limit your losses, you also set a stop-loss order at $1,355.43.
In this example, if the price hits your take-profit level, you will earn a total profit of 30 pips.
On the other hand, if your stop-loss order is activated, you will lose only 3 pips. As such, the risk-reward ratio comes to 3:30 - or 1:10.
In a scalping trading system, when you are placing multiple trades throughout the day - you are hoping to make more winning ones than losing ones. With this strategy, your position will be closed as soon as it makes a loss of 3 pips. On the other hand, all you need is a single winning trade to make up for 30 pips.
In other words, you need to win one trade every 10 losing ones to break even by the end of the day.
Scalping Trading Using Stochastic Oscillator Trading
The Stochastic Oscillator compares the closing price of an asset to a range of its price over a specific period of time. This indicator is used to find out the momentum of a market when it is moving sideways rather than in an upward or downward trend. As such, the tool can be effective in finding potential trading opportunities when scalping trading Australia.
The oscillator is represented by two lines on a chart. The %K line is the fast indicator, and the %D line is the slow indicator.
- When the %K line goes above the %D line - it signals that an upward price trend is to follow. In other words, scalping traders can now open a long position.
- If the %K line falls below the %D line - it indicates that a bearish trend is coming, meaning you can find opportunities to open a short position.
What are the Benefits of Scalping Trading Australia?
Getting started with a scalping trading system is not an easy feat by any means. You need a strong foundation in trading, and be willing to invest a significant amount of time performing technical analysis.
That said, there are many reasons why scalping is deemed one of the most popular strategies among seasoned traders.
Low Market Risks
The main advantage of a scalping strategy is that there is very little risk involved. You are targeting only modest profit margins, and therefore, your losses will also be proportional. By employing stop-loss orders, you can further mitigate any risks of losing too much money.
Non-Directional Trading Strategy
Scalping traders can profit off the market - regardless of whether it is following an upward or downward trend. This leaves you with the potential of finding plenty of trading opportunities.
Moreover, the strategy can be applied to virtually any asset class - giving you access to a wide spectrum of possibilities. For those who are committed to full-time trading, a scalping strategy can be one of the best ways to make the most of market volatility.
Profit From Consolidated Markets
Along the lines of the previous point, scalping trading allows you to capitalize on a consolidated market. This might not be possible with other strategies - as there is not much movement in the price action.
In the case of scalping, the longer the consolidation time, the more trades you can place to take advantage of this tight price action.
What are the Risks of Scalping Trading Australia?
As with any other trading strategy, scalping also comes with its own risks. After all, you are risking your hard-earned capital on market speculation.
With this in mind, it is best that you are aware of the disadvantages of employing a scalping system.
Difficult to Master
One of the main reasons that many traders shy away from scalping is the steep learning curve required. To begin with, scalping requires you to be through with a wide range of trading orders when compared to other strategies. These allow you to have better control over your positions and keep your risks in check.
Furthermore, you also need to be familiar with different technical indicators, as well as have sound knowledge of the workings of the market. Additionally, you will also have to constantly watch over price action activity to adjust your strategies accordingly.
You will also have to search for the next trading opportunity. Scalping trading is only profitable if you are placing a large number of trades per day. In plain terms, the process can be both intensive and time-consuming.
As you can see, adopting a scalping strategy is not an easy undertaking. Unless you have both the time and resources to invest - it might be best to opt for another trading strategy - such as swing trading or day trading.
Requires Substantial Bankroll
As a scalper, you will be placing hundreds of trades a day. That said, even when you are targeting small margins - that does not necessarily mean you stake only small amounts.
In fact, if you trade with only small amounts, you will not make profits that are worth your while. The higher the stakes, the better the profits.
In other words, you are looking at a substantial bankroll requirement on an everyday basis to fund your scalping trading endeavours. This way, the modest profits you earn ensure that scalping is viable.
However, it is also possible for scalping traders to employ leverage to bankroll their positions. But this will involve inviting more risk.
Requires High Levels of Concentration
All in all, it can take years of experience for you to develop a scalping strategy that balances the risks and rewards. If not careful, a small mistake could cost you a significant sum.
For example, let's suppose that you made 10 winning scalp trades with 3 pips per trade. However, it takes only one losing trade of 30 pips to set you back. This is why it is extremely important to employ stop-loss orders.
Scalping Trading Australia Tips
To be a successful scalper trader, you need to know how you can take advantage of a potential trading opportunity.
Below we have listed a few tips that can help you make the most of your scalping strategy efforts while at the same time - protecting your capital.
Tip 1: Make Use of 1-Minute Charts
1-Minute charts are widely popular among scalping traders - as these track the price action of an asset for every 1-minute duration. This makes it easier for you to spot scalping possibilities.
Due to the low time frame used - the 1-minute charts are not of much use in other trading strategies. But for a scalping trader, it can be a powerful technical indicator to rely on.
Tip 2: Use a Demo Account
The best brokers in the online space give you access to a demo account that is funded for paper trading.
Before you employ your scalping strategies in live market conditions, it will be best to backtest them using your demo account. This will allow you to avoid any mishaps and lose money when trading in the real market.
Tip 3: Clearly Define your Exit Strategy
When it comes to scalping, even the minute of market movements can have a serious consequence on your position. Therefore, it is crucial that you have a clear idea of what your goals are.
Meaning, for every trade you place - you should always set up a take-profit and stop-loss order. Typically, scalpers tend to set the goals in terms of percentages.
For example, you might decide that you want to target a profit of 0.4% on all your positions. This means all your trades will have a take-profit set at 0.4%.
Similarly, you should also have an idea of how much you are willing to risk losing and set the stop-loss order at that price level.
Tip 4: Select the Right Assets
Another aspect that makes scalping unique is that you do not need to perform extensive fundamental analysis. Scalping mainly relies on minute price action, and such movements are not always based on market news or updates.
However, that does not mean a scalping strategy will work best for all securities. As we mentioned above, there are a few factors that make some assets more suited for scalping trading Australia than others - such as high volatility and liquidity.
As such, in order to increase your chances of success, it is best that you stick to one or two securities that you find more favourable. For example, if you want to apply a scalping strategy for forex, restrict yourself only to major pairs.
This will allow you to gain more in-depth knowledge regarding the ins and outs of the chosen asset and invest time in finding technical indicators that work best with them.
Check Out: Top 10 Forex Pairs To Trade
Tip 5: Leverage is Optional
It is a common misconception among rookies that in order to be successful with scalping, you need to apply leverage. However, this is far from the truth. Of course, leveraging can amplify your profit potential - but it will also magnify your losses.
Moreover, scalping can be rewarding with a high-win ratio and an effective bankroll management strategy - so leveraging is not a necessary ingredient to this recipe.
How to Choose the Right Online Broker for Scalping Trading Australia?
Remember that some providers in the online trading scene operate without a license. As such, it is your responsibility to find a broker that complies with regulations so that your capital is always protected.
Moreover, choosing the right online broker can determine how successful you are with your scalping strategies. For instance, you want to make sure that the platform allows you to create the orders you need and that it is fast in executing them.
Taking all these factors into account - we have created a checklist that you can use to find an online brokerage platform best suited for scalping trading Australia.
License and Regulation
As we noted above, the regulatory standing of your broker is of utmost importance when it comes to scalping trading. You want to work with only those platforms that hold a license from at least one reputable financial authority.
By choosing a regulated platform, you can be sure that your interests as a trader will be protected and that your funds are safeguarded.
Trading Commissions and Spreads
We have already covered the importance of trading commissions and spreads In the early sections of our Scalping Trading Australia Guide. To reiterate - this can and will directly impact how much profit you get to keep for yourself from your scalping trades.
Consequently, you need to find online brokers that charge minimal trading fees - preferably zero commission rates and tight spreads on your chosen assets.
Scalping trading requires you to use a lot of technical indicators and charts to arrive at your trading decisions. Instead of relying on a third-party platform for this, it will be easier for you if your chosen broker can give you access to these tools.
Scalping trading Australia can be a highly profitable strategy that allows you to trade with minimal risk. It enables you to benefit from small price movements in the market by placing dozens or hundreds of trades throughout the day.
That said, there is a steep learning curve involved to become an expert in scalping trading. Along with time and the right set of tools, you also need to find the right online broker that can swiftly execute trades on your behalf.
Which charts are best for scalping trading Australia?
Scalping traders make use of numerous charts and technical indicators. However, one of the best and easy-to-understand tools is the 1-minute chart. It can give you a view of the price action of your chosen asset for a minute-by-minute timeframe.
Can scalping trading Australia be automated?
Yes, scalping is one of the best strategies for automated trading. You will, however, first need to find a suitable scalping robot and then install the software file into MT4.
Is it possible to lose money when using a scalping trading strategy?
As with any strategy, there are risks involved with scalping trading. However, you can limit this using stop-loss orders and systematic bankroll management.
Should I apply leverage when scalping trading?
It is not necessary that you use leverage to make scalping trades profitable. You can earn money by placing hundreds of trades a day with a high win ratio.