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As you gain more experience and exposure within the world of forex trading, you will undoubtedly encounter an increasing number of trading techniques. One such technique is that of forex scalping. This is a popular strategy engaged by many full-time traders, and is not all that dissimilar to day trading in how positions are managed. So, what exactly is forex scalping?
Forex Scalping – The Basics
Forex scalping is a trading method that focuses on the smallest movements of a currency pairs or market, and the exploitation of this small movement by forex traders. Typically, a forex trader will not care about the direction of movement within a market, but will trade in a high volume of positions over a very short time period.
What this is doing is taking advantage of very small movements that are commonplace in the market throughout the day. These movements could be as little as just a few pips that, to another trader would be somewhat meaningless. To a trader who is engaged in forex scalping though, these small movements of between 5-10 pips can be traded many times within the same trading day. This volume of trading, can help make sure the cumulative profit from forex scalping is increased.
Trading the EUR/USD forex market, a movement of 4 pips on a standard lot of $100,000 is $40. Trading $100,000 to gain $40 may not seem like a great deal, but scalpers take advantage of the market volume to try and execute this type of small trade multiple times in a session.
This is a very simple example but does serve as a common indicator as to the kind of trades that are made by forex scalpers.
Getting Started in Forex Scalping
As mentioned, forex scalping can become a viable trading strategy due to the frequency of trades made when employing this technique. This means that you will need a few key qualities to bet going as a scalper. Primary among these is focus.
Forex scalping takes into account the smallest forex market movements, and typically over the shortest available timeframes. These time frames are usually within the 1-minute charting windows. These tiny movements within such fast-paced time frames may not even register with standard traders who typically operate over at least 1-hour timeframes. The breakneck speed of trading in and out of these small windows throughout a session also require you to have great patience in forex scalping.
Patience in forex scalping is key since there may only be a few small windows of opportunity to engage in scalping throughout a trading day. Despite this, you still need to watch the markets throughout each minute of an entire session if you really want to have the best chances of scalping successfully.
If you are new, you may also have to choose from manual forex scalping or using an automated trading system that does the scalping for you within the parameters that you set. Naturally, manual scalping may be a lot more time consuming, though the use of automated systems usually comes at a price, and such systems may not always be supported by your forex broker.
Managing Risk in Scalping
Managing risk during any type of forex trading is one of the most important aspects. This is something that becomes increasingly difficult as you move into the technique of forex scalping.
Because scalping traders are dealing with such small market movements of as little as a few pips, they typically employ leveraged trading to magnify the gains and make scalping a sustainable trading style. A simple example is as follows:
If your account balance is $10,000 and you are getting into forex scalping, then a market movement of 5 pips is equivalent to just $5. However, if you utilize just a 10:1 leverage, this same movement could result in a $50 profit.
You should be extra careful if trading on leverage in forex though, and particularly if you are scalping which relies on getting in and out of the position as quickly as possible. A number of problems can occur here. The market may move again before you have time to execute the trade and exit the position, or your order may be subject to slippage which can occur in the forex market particularly during periods of high volume or volatility.
Forex scalping is usually most utilized on the release of data or economic news that makes the market move in one direction or the other. Having some experience and knowledge in forex trading in also essential in knowing how this type of news will impact the market.
Is Forex Scalping Allowed?
The short answer here is, no. Forex scalping is not always permitted. It is generally considered to be completely legal regardless of the region or market in which you are trading, though each individual broker have their own powers of discretion when it comes to allowing forex scalping or not.
With that said, most major forex brokers tend to allow both forex scalping and hedging in today’s market. One small factor that may change things is if you are opting to automate the scalping process. This typically requires the use of a forex trading bot or third-party software.
While engaging in automated forex scalping, or other forms of automated forex trading mar certainly save you time, it is important to check whether these systems are both compatible and permitted by your broker.
Rounding up, it is clear that forex scalping is a popular trading method for many in the sector. Taking into account the attributes needed including the focus and level of attention to detail in markets traded, scalping is a technique that may best suit more experienced traders.
Factoring into that, the probable need to trade on leverage, and the requirement to follow every market movement, as well as the potential high trade volumes involved, it becomes quite obvious that in order to engage in forex scalping to any degree of success, you should first devote some time to further learning, and growing as a forex trader.[table “14” not found /]
Anthony is a financial journalist and business advisor with several years’ experience writing for some of the most well-known sites in the Forex world. A keen trader turned industry writer, he is currently based in Shanghai with a finger on the pulse of Asia’s biggest markets.