Forex is filled with all sorts of terms. Some are applied to technical analysis while others are simply day to day terms traders will throw around while discussing their pairs and placements.
Scalping is one of those terms that the trader should be familiar with, because it is going to play a role in the trader’s profits.
In Forex trading, scalping refers to a style of trading used to hold onto a bought or sold currency pair, for a short while after making the transaction. This is done in the hope that a profit will be made during the time that the pair is being held.
The trader who practices scalping is referred to as a Forex scalper. This trader is going to attempt to make quite a few trades and while doing so, take advantage of the price movements that are going to take place throughout the day.
While on the surface it looks as though the trader is simply making small profits, on the wider scale, the trader is actually making fairly decent profits especially as the position size increases.
Scalping is short-term trading. When we say that the trader is going to hold the pair over the short term, we mean minutes or even seconds, rather than hours and their trades will be opened and closed throughout the day.
Naturally, undertaking this type of approach to trading is going to certainly have a few risks, but luckily, those risks are rather small, so long as the trader makes the effort to ensure they stay small.
Relying on leverage is key to understanding and carrying out scalping. By using leverage, traders can aim for larger position sizes which can help ensure that even the smallest price adjustment will result in a decent profit.
Creating a strategy to profit from scalping
For the Forex trader, it is important that they carefully think through their scalping strategies. These strategies can either be manually created or they can be automated to fairly great success.
If the trader is going to take the manual route, they will need to take the time to look for the right signals and then interpret them in such a way that the they will feel confident about either buying or selling the pair they are trading. Understandably, this will require plenty of skill and knowledge, something that might take a little time to acquire.
The other option available to the trader is to use an automated system to generate a strategy. This does not mean that the trader is allowing a system to completely make the decisions at random. Rather, the trader will input data parameters and in return receive information that can be used in the strategy.
Scalping will become even more popular amongst traders in those moments after important, price influencing data is released. Which is why you should always have an eye on the news, as every Forex trader knows that major news events can have a big impact on prices.
The Risks Associated with Scalping
When formulating trading strategies, it is important that the trader always keeps in mind that since prices are quite volatile, their decisions need to factor this in.
Naturally, when you make good decisions, in just a day’s scalping, your profits can grow rather rapidly. But in the same breath, your losses can quickly rake up as well, if you are not making good decisions, or if you are using a system that is not working as it should.
Traders who will be practicing scalping should do so with a trading account that has small spreads, which allows traders to post their orders at about any price, and have low commissions. With this type of account, traders can carry out their trades like a market maker, which means they can buy and sell at bid and offer prices.
Traders should try to make sure that they are not too restricted, price wise, when making their trades. Should they have the commissions or spread too high, the profits are almost certainly going to be lower than they necessarily should be.
Is Scalping Worth it?
Like any form of Forex trading, there are the pros and there are the cons.
- Forex scalping is quite the perfect technique for those who are just getting started out with Forex trading. It is popular amongst newcomers, because it requires very little knowledge.
- Some forms of Forex trading will take some time before the strategies and the decisions take off in such a way that they will bring in those worthwhile profits. But with scalping, traders can within a day, see the results of their decision making.
- Finally, with this form of trading, there is little chance of a sudden change in direction causing considerable loss.
- Because the trading positions are only being held for a short period of time, a single loss can end up damaging all of the profits possibly made during the day.
- With a single trade, the profits are not going to be huge, but overall, they might be worth the effort, and then only if the profits are able to satisfy goals.
- Short position trades simply do not pay off in the same big amounts as long positions.
Interestingly enough, there are quite a few brokers out there who will not partake of scalping.
Like a lot of trade decisions made by Forex traders, taking up scalping as one of the preferred forms of trade is really just a matter of preference. It is a style that is certainly quite exciting, and it is always nice to see your decisions either working out or failing, without having to wait too long.
If you are the kind of trader who wants quick results, scalping could be ideal for you. Alternatively, if can become a form of trading that supplements your more serious trading decisions.
At the end of the day, it is all up to you and what you hope to achieve with your Forex career. But scalping is an excellent starting point.
Frequently Asked Questions
What is scalping in Forex?
Go here for a comprehensive explanation of forex scalping
Is scalping Forex profitable?
Scalping is considered to be one of the most profitable strategies traders can adopt. The trader is not likely to make a single massive profit but rather they will make numerous small amounts which when gathered together will become a large profit.
What is the best time frame for scalping?
Scalping traders use a 1 to 15 minute time frame to trade. 1 and 5 minute time frames are the most popular while the 15 minute time frame is considered to be the least popular.
What is a scalping strategy?
A scalping strategy is a style of trading that allows a trader to focus on small price changes which when correctly executed will result in a profit. Traders make small trades and small profits which when combined will be a sizeable profit.
What is the best scalping strategy?
The 1 minute scalping trade strategy is considered the best type as traders can gain 8 to 12 pips on their trade.