If you want to make a lot of small, quick profits as a forex trader, you are interested in scalping. Algorithmic trading is a great way to increase efficiency and control when you are placing these short-term trades. This article will explain the benefits of algorithmic trading for scalping in-depth. But first, let’s explain a little more about scalping in case you are not familiar with it.
What is Scalping?
Scalping is a form of trading takes place on the 1 and 5 minute charts. You rapidly enter and exit trades throughout the day. Some trades might last a few minutes. Others might be over in mere seconds.
Scalping can be very profitable. As you are working with a small timeframe, there may be numerous trade setups that show up each day, sometimes even just for one currency pair. This can be refreshing if you are tired of waiting around for setups on the daily charts.
Scalping brings a lot of challenges though. For one thing, you need a lot of trades in most cases, since you may frequently exit after just a few pips.
For another thing, trading on lower time frames exposes you to more whipsaws and volatility. You also need rapid reaction times.
Let’s discuss how algorithmic trading can help you to overcome some of these challenges and improve the results you get from scalping.
1. Execute trades more quickly.
Scalpers who are trading manually need to watch the charts for trade setups. When they spot one, they may need to make a decision whether or not to enter immediately. Even a few seconds of delay might cost them the opportunity.
Worse, if you enter too late, you could find yourself caught by a sudden move in the opposite direction, costing you money. Few things are as annoying as losing a trade you would have won if you had just been faster with your reflexes and decision-making.
Sometimes it isn’t even your reflexes that are the issue. Maybe you just took too long to enter your order details.
Algorithmic trading gets you around these problems by automating trading according to the algorithm’s rules.
With the algorithm firing off trades on your behalf, you don’t need to worry about missing out on setups or losing money because you were simply too slow. The algorithm can enter and exit almost instantly when opportunities appear.
2. Make more trades.
Not only can you enter and exit scalping trades more rapidly with the help of an automated trading robot, but you can also use algorithmic trading to trade more prolifically.
In the past, you might have only been able to manage a small number of scalping trades. You probably only opened one at a time manually. You also might sometimes have missed trades because you were still mentally recovering from the previous one when the next setup appeared.
But with algorithmic trading, you can enter a lot more trades. The algorithm can juggle multiple trades simultaneously or back-to-back with no problems. It will not become overwhelmed, or run out of time to submit orders. It also can trade 24 hours a day without tiring, so sleep and work don’t have to get in your way. Being able to make more trades means you can potentially build up your profits more quickly.
3. Reduce human error.
When you are trying to scalp, you have to fill out your orders quickly and submit them right away. Sometimes you may barely have time to think. Hopefully you are able to at least give everything a quick glance to double-check, but do not be surprised if you make some mistakes. Those mistakes can cost you money.
You can rely on algorithmic trading to reduce human error. Unlike you, a trading robot will not become distracted or fatigued. It will just follow the rules that it is programmed with, accurately filling out orders every time.
4. Decrease fatigue.
Not only do bots carrying out algorithmic trading not get fatigued, but algorithmic trading can also help you to be less fatigued.
Forex traders are notorious for getting sucked into cycles of poor life-work balance. A common scenario is to feel like you are “not doing enough”. Impatient to reach your goals, you try to hustle more, working day and night on your trading. But then you start sacrificing sleep and other important needs, causing you to underperform. You then get more desperate, and begin sacrificing even more.
Algorithmic trading helps you to avoid this cycle or end it. You no longer will feel the need to stay up all night staring at your charts, or give up on leisure time on your weekends. The algorithm will take care of it while you get your rest.
5. Get your emotions out of the picture.
When traders make emotional decisions, it can quickly result in losing a lot of money. Anyone might trade emotionally regardless of their trading methods, but scalpers may find themselves extra vulnerable to this tendency.
Emotions run high when you’re taking short-term trades. The rollercoaster of ups and downs can unfold in seconds. And since you’re in a rush and everything is happening so quickly, you may simply not have enough time to step back, regulate yourself, and make smarter decisions.
When you trade with an algorithm, you can remove your emotions from the situation. In fact, you do not even need to be watching your charts while you trade. Just let automation take care of it. If you are prone to panic selling, etc., you actually would be better off this way being less involved.
Algorithmic Trading Can Make Forex Scalping Easier and More Effective
Algorithmic trading can help you overcome a lot of the challenges of scalping, allowing you to place more trades more quickly with high accuracy. Continue exploring our posts to learn more about how you can get started with algorithmic trading.
