Some people look at forex trading as a sure-shot way to make profits. Most of them think that as forex markets operate 24-hours a day, the opportunities to make profits are also unlimited. However, the forex market is not the place where you can speculate and make quick bucks.
To become successful in forex trading you need to understand the market and its operation, practice your strategies, know when and what to trade, and so on. Even with these, if you don’t use certain strategies at certain times, you are less likely to be successful.
The first step in forex trading is to know the forex market thoroughly. Although it is the largest and most liquid market in the world, it is not controlled by any regulatory bodies. It is an over-the-counter market that is open throughout the day because of the geographical locations and time zone differences.
The big four markets – Sydney, Tokyo, London, and New York – operate at different time zones, thereby enabling 24-hour trading.
If you are a new trader, you should always bear in mind the following key aspects:
- Position sizing
- Risk management
- Exit strategy
You should plan and create your strategies around these three important aspects.
Read More: Devising A Profitable Forex Trading Strategy
Scalp trading, or scalping, is a trading style that focuses on benefiting from small price changes and making a quick profit through reselling.
Forex Scalp trading strategy is largely dependent on a strict exit strategy because one big loss could negate all the small profits you made. So, in a way, this strategy tests your willpower and decision-making skills. The greatest challenge here could be the willingness to accept that everything you thought you knew about trading could be wrong in this case.
While most of the guidelines and learning materials might have told you to stick to your strategies, if you follow scalping, you might have to abandon them all. Scalping is not about sticking to well-planned usual strategies and convictions. It is more about taking quick advantage of the price changes. It means you’ll have to complete trades in as little as five to ten minutes.
Likewise, scalping is not the strategy to make a big call and stick with it. In most conditions, that’s what you should do. But, never in scalping. Here, it is all about small things adding up to a big one. It is where you trade a large number of small trades to earn a huge profit. It might need you to undertake several transactions a day – perhaps hundreds of them.
Choose Your Currencies Well
In normal day trading, you might have chosen to trade a currency pair that could see a lot of volatility during the day. The idea would be to gain maximum profit from the minimum transactions. However, in scalping the opposite is true. You should never put all your chips into a single bet on asset price shifts. Instead, your strategy should be to profit from minor price changes.
Scalping is about taking advantage of comparatively small price movements. However, you need to analyse the currencies involved thoroughly. The best way to choose would be through the process of elimination. It is always advisable to stay away from the currency pairs that are inflation prone as they are likely to be highly volatile. Volatility is something you should avoid while scalping.
Opt for a Stable Currency Pair
For scalping, a relatively stable currency pair is the ideal choice. You can analyse and predict the movements if the currencies are less volatile. One of the popular choices is the USD/EUR pair. It is the pair with the largest trading volume and usually has a narrow range, making it an ideal option.
However, this pairing has certain drawbacks too. The major drawback is that both represent a massive trading block. They could be issued by governments and supervised by autonomous central banks. In a sense, there is no comparison between the two.
While the USD is backed by the federal government, treasury, and the central bank, the Euro is the common currency of 19 nation-states. EUR is not backed by any federal government, is crisis-prone, and does not enjoy widespread public spread like the USD does.
Another disadvantage is the difficulty of analysing the European Central Bank, as compared to the Fed Reserve. There are too many variables involved. Right from the position of the individual board members to the demands of the southern countries, the position of the European Commission, and the influence of Germany can affect the movements.
The problem is aggravated by the language barriers that must be overcome to analyse the pronouncements of the ECB’s movers and shakers. Also, the ECB is significantly more autonomous than the Fed, and it creates another level of difference.
If you choose the USD/JPY pair, you can overcome most of the problems of EUR. But the greatest disadvantage is the more evident language barrier. Furthermore, the Bank of Japan is not independent and hence it is likely to see political interference.
The Ideal Choice
Now that you have eliminated the unsuitable pairs, let us come to the suitable one - GBP/USD.
The GBP/USD is the best forex pair to scalp and much better candidate for forex scalping as they share a lot of common points. The Fed and the Bank of England are similar - independent but accountable central banks. Besides, there is no language barrier as both countries have a common language. Moreover, the legal systems of the two nations are remarkably close.
The fact that the performance of the pound against the dollar is reasonably strong also works in the favour of this pair. It gives the scalpers, fair chances for meaningful gains. Apart from these, the recent decisions made by the US president in favour of a massive stimulus package in the US have rendered the USD a less attractive asset.
Also, while the Brexit deal might have made it harder to foresee the future gains for sterling, it will not affect the scalp traders.
As mentioned at the beginning of the article, scalping is not a long-term strategy or a wait-and-watch game. It is all about getting there, trading, and exiting the market in the shortest time possible. The aim is to make a profit from movements in the sterling/dollar rate, no matter which way they swing.
Successful scalping needs foreseeing such movements. However, the foresight can be achieved only through a careful and constant analysis of the factors that push the currencies - economic expectations, fiscal policy, and interest rates.
There are some advantages of choosing the USD/GBP pair for scalping. Both countries have a similar approach to economic management, gives priority to a strong private sector, competitive tax rates, and a high rate of growth. The long history of two-way trade across the Atlantic, providing you with patterns that can be analysed.
In short, while the USD/GBP pair might lack the exotic attraction of some more obscure currency pairs, they have all the right attributes for scalping, Remember, scalping is not about winning a big sweep – instead, it is about winning small trades that add up to a mighty big one!