Speaking about psychological competences, important for a trader, I would first and foremost single out emotional intelligence. Under emotional intelligence, I understand the ability to distinguish and name your own and other people’s emotional states. Why is emotional intelligence important for traders? I suppose that many traders would like to “get rid of emotions” to avoid losses that emotions often cause. However, such ridding would make a person unable to make decisions. An ability to find your way in complicated social situations that are influenced by the “psychology of a crowd” (and a financial market is exactly such a situation) presumes not only the skill to single out patterns (graphic, statistical) from a mass of data but also to feel correctly the market sentiment. To a larger part, market sentiment is the information unavailable to algorithms (though there are attempts to create algorithms that would estimate market sentiment). Putting things very simply, we might say that the price impulse, spurting from a range and supported by professional demand/supply, will provoke the stereotypical reaction of traders who will try to sell at “inflated” prices. As a result, the trend will further be moved mostly by the emotional reaction of short-term traders who would be closing their positions. A high level of emotional intelligence will let the trader detect such situations and react accordingly. For sure, the main role of emotional intelligence is to detect your own emotions. If a person (trader) experiences some emotional state that they cannot recognize, this might distort the perception of the market and push out some important information. Simply speaking, the trader will start looking for reasons to make a trade (and find them). In contrast to a simple reactive action, when the trader moves the Stop Loss or “enjoys revenge” on the market, the process here is much more complicated and hard to detect. A trader with distorted perception of reality will be sure that their analysis has been objective, accounting for all necessary factors; alas, their attention will be focused very selectively.
Definition of ‘Scalping’
A trading strategy that attempts to make many profits on small price changes. Traders who implement this strategy will place anywhere from 10 to a couple hundred trades in a single day in the belief that small moves in stock price are easier to catch than large ones.
Investopedia explains ‘Scalping’
Traders who implement this strategy are known as scalpers. The main goal is to buy (or sell) a number of shares at the bid (or ask) price and then quickly sell them a few cents higher (or lower) for a profit. Many small profits can easily compound into large gains if a strict exit strategy is used to prevent large losses.
Scalping is a very short term trading style, and despite its odd name, it is quite a popular trading style among professional traders. Scalping is the shortest term style of trading (even shorter than day trading), and is so named because it attempts to make many small profits throughout the trading day.
Scalping is Technical Analysis
Scalpers are always technical analysis traders (as opposed to fundamentals traders), but they can be either discretionary or system traders. Discretionary scalpers will make each trading decision in real time (albeit very quickly), whereas system scalpers will follow a scalping system without making any individual trading decisions. Scalpers primarily use the market’s prices to make their trading decisions, but some scalpers also use one or more technical indicators (e.g. moving averages).
Scalping chart timeframes, and the amount of time that each trade is active, are the shortest of all of the trading styles. For example, a day trader might use a five minute chart, and make four or five trades per trading day, with each trade being active for thirty minutes. In contrast, a scalper might use a five second chart (where each price bar represents only five seconds of trading), and make twenty or thirty trades per day, with each trade being active for only two minutes.
As with any other style of trading, there are many different methods of scalping. The most well known scalping technique is to use the market’s time and sales to determine when and where to make trades. Scalping using the time and sales is sometimes referred to as tape reading, because the time and sales used to be known as the tape. Other scalping techniques are similar to other trading styles in that they use bar or candlestick charts, and determine when and where to make trades using price patterns, support and resistance, and technical indicator signals.
Scalping is most suitable for a specific type of trading personality. Scalpers must be very disciplined, especially in the case of system scalpers, as they must be capable of following their trading system precisely no matter what. Scalpers must be able to make decisions without any hesitation, and without questioning their decisions once they have been made. However, scalpers must also be flexible enough to recognize when a trade is not proceeding as expected (or hoped), and take action to rectify the situation (i.e. exit the trade).
To Be or Not To Be a Scalper?
If you are a position trader that uses daily charts, and makes your trading decisions over the course of an entire evening, you are most likely not going to make a good scalper. However, if the thought of waiting several days for your next trade drives you insane, then perhaps scalping would be suitable for you. Scalping can appear easy because a scalper might make an entire day’s profit within a few minutes. However, this is an illusion, and in reality scalping can be very difficult because there is very little room (read as no room) for error. If you do decide to try scalping, make sure that you do so in simulation, until you are consistently profitable, and are no longer making any beginning mistakes (such as not exiting your trades when they move against you).
Many traders buy/sell various assets every day but few of them have an idea of how to estimate correctly the quality of their investments. Professional traders quite often use ROI (Return On Investment) — an index that helps to assess how fully your investments have paid back, which, in the end, will allow the investor to make money in the long run. Also, ROI is used for efficient investments not only in business but in any financial assets. Mathematically, ROI is the relation of the net profit to the investment. What is the ROI needed for? Talking about real business, this index helps to estimate your investments in the long run. And if the trader or investor wants to sell the profit from selling the securities, ROI helps to compare different companies and see which stocks will be more profitable. Thus an investor can compose their portfolio of the most stable companies, regardless of market fluctuations. To estimate investments in stocks, we can take any security and see on its example, what ROI we will get.
Many traders who use Forex terminals have come across a situation when they fail to place a lock and their open order is closed. Another type of such a situation: when a second position on an instrument is open, the first position increased its volume for no obvious reasons. The explanation may be simple: the account could have been open by the Netting system. The Netting system allows only one position open in any direction for one instrument. The system is used all over the stock market. To put it simpler, the trader cannot open selling and buying position on one instrument simultaneously – the positions mutually close, the orders open in one direction summing up. The Hedging system allows as many open positions in different directions as you wish.
This is my first blog writing about forex trading and analysis of chart.