Forex Scalping
What is Forex Scalping?
Forex Scalping is a method of training among many other method and strategies that are used by traders. Scalping is also called quick or seconds trading, as the trader keeps a position open for usually less than a minute with the aim to make a tiny profit from a market movement. Scalping if correctly used exposes the trader to a limited rise due to the very short stop loss, but also returns a limited profit due to the short profit target. Scalpers would aim for limited profit in multiple transactions, rather than bigger profit in one transaction (long term).
A Forex Scalping example
An example of scalping would be to open a position with the target of taking a 10 or 5 or even less pips. Scalping is made profitable due to the highly leveraged accounts that are provided by the forex brokers. For example with capital of $1000 and a normal leverage of 1:100, the trader can open a trade of 100,000. A profit of 1 pip would be a gain of $10. In the case that the trader would take profit at 5 pips (considered very small profit in forex trading) – this comes to a profit of $50 for a few seconds trade. $50 compared to a capital of $1000 is a 5% gain in a matter of seconds. Compare this with the 5% (if you are lucky that the bank would give as annual interest)
Who practices Forex scalping?
Scalping is usually practiced by experienced traders that have been in the market for some time, are well aware of its dynamics and the dynamics of specific currency pairs and feel confident as to when the market would move one direction for a while. In order to use scalping methods – you need to know the market, know when to expect movements and how much this movements will be (for example when important financial data is out). Don’t forget that scalping involves risks as any other method of trading, so don’t use it before you are well aware of the risks involved and have designed your risk management strategy.
Forex Scalping Risks
Scalping as any other trading method involved risks that the trader needs to be aware before engaging in practicing; the most basic risk is that a tiny movement in the wrong direction would hit your stop loss. Thus your stop losses should be correctly calculated depending the currency pair and period of trading. Also it is street knowledge that some forex brokers spike the signal unlike the market when high amount of stop losses exist and thus hitting the stop losses and closing the trades. This information cannot be confirmed, but it was noted by many traders. In this case you should try and go under the radar of the broker
Forex Scalping and Currency Pair Spread
Another issue is the spread of the currency pair. Since scalpers aim for profits of 3 or 5 pips, then a spread between buy/sell of 3 or 5 is considered huge, since the trade first need to cover this spread and then start profiting. Thus most knowledgeable scalpers would trade on the EUR/USD that usually has the smallest spread. In case that you would like to trade as a scalper then while choosing a broker, the spread is of extreme importance to you, as opposed to someone that opens long term positions with the aim of 200 pips. By trading many smaller size trades rather than big one.
Forex Scalping and Price Delay
Scalpers can sometimes take advantage of price delays between different price platforms. For example a trader with access to Bloomberg can discover that there is a few seconds delay between the price on Bloomberg and the price of the broker’s platform. This few seconds will give you the opportunity to scalp a few pips. This usually is not allowed by brokers and if found that you are abusing the price latency of their platform you might have your account closed. Transmission delay is also very important to scalpers, since a tiny delay can change the direction of the market. You should know whether your forex broker transmits your trades straight through to the market electronically or whether this is done via trade desk.
Forex Scalping and time of the day
Scalping is not suitable for all times of the day. Scalpers usually aim for highly liquid and volatile markets that will spike many pips one way before changing direction. No experienced scalper would trade a currency pair or a time of the time that there is no volatility in the market. These times are usually the opening of major exchanges (London, New York, Tokyo), times of significant financial news and other events that will allow the trader to catch good price movements
Non Scalping Forex Brokers
There has been the rumors that some brokers do not allow scalping and would close your account if found to do so. This is not the case with most brokers internationally, but a form of precaution does confirm this with the broker of your choice. Some brokers will charge an extra fee (usually 1pip) for active and aggressive scalpers. There is no standard in the industry and most brokers will have no problem with your technique, but it might become a problem if you are always doing this and always winning. A risk the brokers are trying to cover themselves from is that some traders would abuse the latency of price feed between two price platforms and thus abuse the broker for a few seconds.
Writer’s Thoughts
Scalping is my favorite trading method and I have been quite successful using it. It is not a difficult method to understand and use, but it requires extensive knowledge of specific currency pairs, knowledge of the different trading times – not all times are for scalping, and also a thorough calculation of risk management and profit targets for your trades. It is advisable if you are new to this kind of trading to use a demo account for a while, trade a specific currency pair with specific strategies that suit your capital and risk appetite and when you feel comfortable with that repeat the same strategy with real money.
