Session 1: Advantages and Disadvantages of Scalping [Forex Demon]

Scalping with high reader support. It is popular because it has the potential to significantly increase a small amount of funds in a short period, but in reality, not many people succeed. In fact, scalping is the most costly trading style, requiring a stringent logical framework and the mental discipline to implement it. We have prepared a program here that teaches these systematically. It will be lectured by Kawaoi, a professional trader specializing in scalping in the currency market.

【Master's difficult-to-learn but lifelong scalping techniques for currency trading by [Kawa Oni] (6 sessions in total)】
・Episode 1: Advantages and disadvantages of scalping
・Episode 2: How to start scalping effectively
・Episode 3: Basic scalping strategies
・Episode 4: Contrarian scalping methods
・Episode 5: Practical scalping techniques
・Episode 6: Secrets to improving scalping

Kawa Oni (Currency Oni) profile

Graduated from Sophia University, Faculty of Foreign Studies, English Department. A former foreign funds trader and currency dealer at a securities company, now serves as president of an investment company. Specializes in ultra-short-term scalping, where entries are settled within minutes, making hundreds of trades a day. All trading history is published on the official blog “FX Scalping Master!”. Notable book: “FX Scalping Guide for Currency Oni” (Diamond Inc.).

Official site：FX Scalping Master! Currency Oni

Various advantages (edges) of scalping

What kind of trades do you usually make, readers? Day trading, or swing trading? Some of you may not yet have a clear method decided. There is no single correct way to trade, so it is not surprising if there are as many approaches as people.

As for me, I am in my 14th year of FX, and I have experienced many trading styles, including day trading and swing trading.

Ultimately, I arrived at a method called “scalping,” which completes in seconds to minutes. I feel scalping has various edges (advantages) in the market, the foremost being its overwhelming capital efficiency.

In other words, you can start with a very small amount of operating capital and have the potential to multiply it many times in a short period.

If you aim to significantly grow a small amount of funds in a short period, scalping is almost the only feasible path. Starting here, I will discuss the魅力魅力 of scalping and concrete methods step by step.

＜The Edge of Scalping＞

・Efficient use of capital
・Can rapidly grow a small amount of operating capital

Comparison of scalping with other trading styles

Day trading refers to “day trading” where buying and selling are completed within one day. Swing trading involves slightly longer trades completed in a few days to about a week. Position trading goes for several weeks to months.

Incidentally, the term scalping originated from a Native American practice of scraping enemy scalps thin. Like scalp shaving, it aims for small profits of a few pips repeatedly. This is in stark contrast to day trading or swing trading, which target tens of pips or more.

Moreover, the time required to complete a trade, i.e., the duration you hold a position, is extremely short—often only a few seconds and on average a few minutes. In my scalping method, the win rate is about 70–80%, but generally, the shorter the trade, the smaller the profit per win, so a high win rate is necessary to stay profitable.

On the other hand, long-term position trading can have arbitrarily large profits from a few winning trades relative to losses, so the required win rate varies by style and method. However, one thing is certain: the shorter the time to complete a trade, the more the costs like spreads, commissions, and slippage hurt, requiring higher accuracy at entry and exit, making it technically harder.

＜Types of Trades＞

【Day Trading】 Trades completed within one day
【Swing Trading】 Trades lasting a few days to about a week
【Position Trading】 Lasting several weeks to several months
【Scalping】 A method that accumulates small profits within a few minutes

Compared with other trading styles, scalping has an overwhelmingly high number of trades. While day traders may make a few trades per day, swing traders a few per week, scalpers may make several dozen or even hundreds of trades per day. Short trading times and high frequency mean that even with small funds you can significantly grow your capital.

Now, let’s run a concrete simulation. Consider trading USD/JPY with a capital of 300,000 yen. The maximum leverage for individual accounts at domestic FX brokers is 25x, so trading 10,000 units requires nearly 50,000 yen as margin.

First, suppose a swing trade with take profit and stop loss of 100 pips, trading twice a week. Since losses can occur, you must trade with a lot size that can withstand a 100-pip loss.

Under these conditions, the maximum lot size would be 50,000 units, but trading at 50,000 units would require almost 250,000 yen in margin, and losses would be financially tight. Therefore, realistically, the maximum would be around 30,000 units. In other words, for a typical swing trade, 10,000 yen of account capital supports about 1,000 units.

Now, with 300,000 yen, trading 30,000 units twice a week with 100-pip take profit and stop loss would yield +60,000 yen on a two-win streak, break even on one win and one loss, and -60,000 yen on two losses. If you achieved eight consecutive wins in four weeks, profits would be +240,000 yen without changing the trading lot, growing the account to 540,000 yen.

Furthermore, with compounding, if you increase by 10,000 units each time you gain 100,000 yen, eight consecutive wins in a month could grow the trading account from 300,000 yen to about 600,000 yen. In reality, continuous wins for a month are unlikely, so typical results might range from a few tens of thousands to about 100,000 yen monthly.

Therefore, if you aim for 300,000 yen monthly profit via swing trading, of course it depends on trading skill, but generally you would need around 1,000,000 yen in capital.

＜Trading style vs. win rate and profit range＞

・The shorter the time frame, the higher the win rate must be to stay profitable
・Longer-term trading can be profitable with as little as a few winning trades

The potential to earn with small capital: scalping

In my personal view, FX is essentially something you should do with small capital. I also trade individual stocks, but with stocks, earning a meaningful amount typically requires several million yen in capital.

FX, by contrast, allows you to earn far more with far less capital thanks to leverage.

As for swing trading, it was stated that about 1,000,000 yen is needed to earn 300,000 yen per month, but how about scalping? We simulate 20 scalps per day with 5-pip take profit and stop loss using 300,000 yen.

The maximum feasible lot would be 50,000 units, and even if you lose with that lot, the loss would be limited to 2,500 yen, so it’s not a financial problem. If you won every trade in a day (20 straight), you’d gain 100 pips and 50,000 yen without changing the lot size.

Such a perfect scenario is unlikely, but if you kept winning for a month with no change in lot size, your trading account would grow to about 1,300,000 yen.

Moreover, if you reinvest profits into subsequent trades, you have tens to hundreds of times more trading opportunities than day or swing trading, and the compounding effect on wealth growth is incomparable to other methods.

For example, using compounding by increasing the lot by 10,000 units for every 100,000 yen gained, if you win all trades for a month, your initial 300,000 yen could grow to about 9 times, around 2,640,000 yen. Of course, a full month of all-wins is unrealistic; empirically, you might expect several tens of thousands to around 1,000,000 yen in a month.

Therefore, if you aim for 300,000 yen monthly profit, whether swing trading or scalping is chosen, results depend on skill, but scalping could be feasible with roughly 200,000 yen in capital.

＜If you aim for 300,000 yen monthly profit…＞

【Swing Trading】 (Take profit/stop loss = 100 pips)
Account capital of 100,000 yen supports up to 10,000 units. About 1,000,000 yen in capital is needed

【Scalping】 (Take profit/stop loss = 5 pips)
Trading with the maximum lot (50,000 units) limits losses, so it’s okay. Compounding with around 200,000 yen is feasible

Long wait times are fatal for part-time traders

Beyond the obvious capital efficiency, what other advantages does scalping have? The most obvious is “time.” This refers to wait time before entry and the time already spent holding a position before exit, i.e., the duration of holding time, in two senses.

For example, even if there is a highly effective day-trading method with several opportunities daily, a part-time trader cannot always expect such opportunities. Of course you can trade using limit orders, but this approach is not realtime decision-based and is heavily influenced by luck.

In contrast, scalping typically offers dozens of trading opportunities per day, and in my method about 100. Even a few hours after work can present trading chances.

From this perspective, no matter how excellent a day-trading or swing-trading method is, if opportunities do not come within your tradable hours, it is like a “pie in the sky.”

Can you survive a currency shock?

Also, the shorter the time to complete a trade, the greater the advantage for part-time traders. In scalping, most entries and exits complete within minutes, and even as a full-time trader, I feel many benefits daily.

For example, unlike swing trading where you hold positions for days to a week, you won’t be constantly worried about market moves when you are working, which could otherwise negatively affect your job and daily life.

Also, the longer you hold a position, the more time there is to incur losses, causing psychological stress. With scalping, you hold positions only while at the computer, so you don’t need to monitor market movements constantly.

In the currency market, there are times each year when prices swing dramatically. Scalping minimizes the time your funds are exposed to risk, and you can exit immediately when you sense danger.

＜The time advantage＞

【Time to entry waiting time】
High likelihood of encountering trading opportunities

【Time to exit waiting time】
Holding a position for too long is avoided

The pitfall of scalping

As described so far, scalping has many attractions. However, many investors and traders have a negative image of scalping despite its numerous benefits.

In fact, there are books stating “I do not recommend scalping for beginners,” and blogs arguing that scalping is unprofitable. Why is that?

This is my own guess: many investors feel that consistently winning with scalping is extremely difficult. As noted earlier, scalping involves far more trades than other styles, so spread and slippage per trade can heavily affect performance.

Therefore, it’s hard to build a positive expectancy trading logic that covers costs like spreads and slippage. Even with an edge in scalping, you must implement the trading logic in real time, which requires a strong mental fortitude.

Considering these challenges, a trader who tries scalping casually is unlikely to win long-term. Hence many people may reject scalping after their own unsuccessful experiences.

Of course, I do not claim that scalping is easy to win with. On the contrary, I feel that the skills required for scalping may be higher than those for day trading or swing trading every day.

That is why if you master a skilled scalping edge, the rewards could be several times higher than other trading styles.

So how should you master scalping? In the next article, I will delve into this topic further.

・It is difficult to cover costs and create a positive expectancy in the logic
・Mental strength is essential for implementing the logic
・Many people try it casually and fail

※ This article is a revised edition of an FX攻略.com August 2016 issue article