The forex trading market is one of the busiest and most complex in the financial world. There are many techniques employed in this market that includes range, trend, trading, day and swing, to name a few of the most used ones. There is also one unique strategy that is a little different from the conventional ones – forex scalping.
So what exactly is this technique and how is it different? Here is a closer look at the ins and outs of forex scalping.
What Is Scalping?
Scalping is a type of trading in the forex market where a trader aims to make even the tiniest of profit by taking advantage of the smallest of changes in the price of a currency. It’s a technique used in the stock market as well where a trader looks to get a quick return when a share price changes even marginally.
Theoretically, by making a large number of trades to accumulate even the smallest of gains, a trader is able to rack up a sizeable profit in a day. The frequency of the transactions and the numbers done are key here. Even if some of these trades result in losses, the overall result can be positive if the majority of them end up with gains.
The technique of scalping relies on data and trends. Using manual calculations is one way to do it but automating the process can yield better results. Traders using scalping strategy, work with software that use sophisticated algorithms built around data focussing on market movements. With predefined conditions and guidelines embedded in the software, placing a trade at the right moment and levels becomes easier to execute.
Successful scalping depends on getting the entry and exit points right. For this, the currencies with the best liquidity need to be used to effectively and consistently scalp profits. As spreads are usually tight in forex trades, you will need to work with pairs that move fast and regularly.
The actual process of forex scalping begins with opening a position with a forex pair. The movement is closely tracked manually or, preferably, in an automated setting with the aim being a quick exit during a price movement.
This movement called a PIP or Percentage in Point, denotes the least movement in the price of a currency pair. These trades are done during really short durations, for example, a minute where volatility owing to a news or development on the economic front can result in the movement of a few pips.
Over a day and across numerous trades, the possibility of a handsome net gain is what makes scalping so attractive a strategy. Increases of five to ten pips per trade repeated over multiple trades can be substantial.
Scalping Trading Advantages
✅ Faster profits:
When compared to other forex strategies, the opportunity to record higher profits is greater in scalping trading. And unlike other strategies like position trading where you hold positions for months, in scalping, you do not have to wait long to see money coming into your forex trading account. This also boosts your confidence.
✅ More trading opportunities:
As you open and close your positions in quick successions, there are never-ending opportunities to enter a trade. Trading opportunities on lower time-frames develop quickly; so you will not get bored while scalping.
✅ Less market analysis:
For many other forex strategies, you would need to analyse the market and follow the indicators. However, with scalping, though you may need to be regularly updated with the latest in news and developments from around the globe, you do not have to spend time studying market trends and analysing other fundamentals.
✅ No overnight swaps or interest:
There is a varying overnight interest rate for each currency. So, if you’re scalping, and as there are no overnight positions, there is no accumulating swap.
Read More: Devising A Profitable Forex Trading Strategy
Scalping Trading Disadvantages
❌ Trading fatigue:
Given the relentless pace of trading and the need to be alert all the time, scalping only suits you if you can handle the action and also have the stamina to sit throughout the day.
This strategy can be risky, if not implemented correctly. There is a very small margin for error, so if you do not really understand what you are doing, your account will slowly decrease.
As you may open multiple trades a day, you may tend to over trade which is not advisable for your health in the long term.
Is Forex Scalping Right For You?
Is scalping an easy and quick way to make a fortune? Well, not quite. Trading in financial markets and forex more so, can be extremely tricky given the variables and unpredictability in the market. But in something so fast-paced and unconventional as scalping, it is even more so.
It’s a given that all trading in forex demands a strong understanding and experience. In the non-stop arena of scalping, it means being constantly updated with the latest in news and developments from around the globe. Anything that happens that has a direct or indirect bearing on the currency pair means entering or exiting, as the case may be.
Besides, unless a trader who wants to be a successful scalper has the ready availability of a corpus to trade, managing the sudden demands of working capital can result in a cash crisis.
Anyone who wants to do well in scalping also would need to make snap decisions. This often involves discipline and courage in terms of foregoing a possible profit to cut losses. It also might require sticking to an exit plan and not get swayed by the promise of increased but uncertain profits.
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