Is Scalping A Viable Forex Trading Strategy?

Last Updated July 23rd 2021
5 Min Read

Forex transactions can be one of the trickiest forms of trading and is highly demanding of your time and attention. There are many forex trading strategies that are employed to maximise profits and minimise risks. These can involve both long term and short term positions. 

Some of the strategies that can be followed are position trading, day trading, scalping, swing trading, and carry trading.

Scalping Trading Strategy

An oft used forex trading strategy is scalping which can be both rewarding and risky, depending on how adeptly it is used. It is similar to day trading where the intention is to make and maximise profits during a session. But scalping goes a step further - the transactions here last for much shorter periods ranging from hours down to minutes and even seconds. 

So what is scalping? In a broad definition sense, it can be summed up as a trading strategy that is employed to benefit from even minor upswings in the price of the currency being traded. So, the idea is to cash in on even the smallest of increases in the currency rate and sell one’s holding and cash out with a profit. These, typically, are many trades that are of extremely short term duration, where the scalper targets to exit upon even a slim gain. 

Besides the margins being fairly meagre, the final profit can further reduce after taking into account the trading costs. The commissions per trade can rack up a sizeable amount of operating costs that need to be factored in. 

But there is still a decent profit that you can book in a day by using scalping as a strategy. The trick here is to hold your position for just enough time to see an uptick in the currency traded in and selling it for a profit, however small. If this can be repeated multiple times in a day, the theoretical possibility of registering a smart overall profit for a session remains. 

To scalp effectively, you would need to rely heavily on charting tools that help analyse the technical details involving the movement of currencies. Such analysis and data translate to signals and cues that help in making buy and sell decisions in a fast-moving market. These automated trading systems are widely available on forex trading platforms so that you can place your orders with forex brokers in line with signals that are triggered based on market movements. 

Read More: Forex Scalping: 5 Simple And Profitable Strategies

The Risk To Reward Ratio 

Pegging the reward too high and not adhering to stop loss margins can be dangerous and result in too little returns or high losses. 

From a behavioural standpoint, to be a successful scalper, you would need to have some traits over and above the domain expertise and a formidable capital. Those indulging in scalping need to be highly alert, decisive and disciplined. 

The thing with scalping is that while the going is good and profits (however small) keep coming in, it can be satisfying and even addictive. But the moment a chain of losses begin, it is difficult to turn around and justify the strategy. Hence, as a trader who practises scalping, you must have a clear exit strategy without which even one trade gone wrong could wipe out the entire profit of a day. This discipline coupled with the maturity to not let emotions rule over a situation helps avoid unnecessary losses. 

Given the inherent demands on a minute to minute trading that must be done, if you are a beginner, scalping can be daunting. Professionals and experienced traders are more likely to handle the pressures of this manoeuvre better. A deep understanding of the risk in situation after situation, trade after trade can only come after a long stint in the forex market. You should also have a keen eye to seize the right opportunity that presents itself. These usually lie in minor movements and exploiting these for even tiny gains can be more frequent than a rare big surge. 

Check Out: What Is The Importance Of Risk Management In Forex Trading?

What Are The Ground Rules To Adhere To Make Scalping Work For You?

Given the inherent risks involved, there must be a sizeable corpus at hand to begin trading. The leverage that needs to be managed would be large and should be enough to cater to the numerous short trades entered into. 

Start off and stick with currencies and trades with the lowest spreads. While doing multiple trades with small margins, remember that even a single pip can make a difference overall. 

Only assign a small part of your over portfolio and trading to scalping. Making it your main trading strategy can be highly risky and can impact your long term wealth. Restrict your scalping tendencies to only asset classes you are comfortable with. Therefore, if you have a good grip on scalping techniques, in general, and on the forex market, in specific, it can be a part of your overall trading strategy. Peg your risk-reward ratio at 1:1 to ensure there are no wild negative swings. It is important that buy and sell decision are purely a technical call and not driven by emotions. And always remember to listen to your gut feel when faced with an adverse situation.

While scalping is a tricky strategy that is more suited to those with expertise and experience, it also attracts beginners. The nature of the trade is something of a quick gamble and also possible with small amounts over many transactions. This makes it an attractive proposition for those who are only learning how to do conventional forex trading. 

Besides, those who do not want to wait longer and take long positions also would prefer this short variant of trading in forex. The very liquid nature of the forex market also lends itself to scalping.

Read More: The Ins And Outs Of Forex Scalping

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