Forex Scalping 101
Forex scalping is gaining popularity in today’s foreign exchange trading industry. The forex market is a venue for the buying and selling of foreign currencies where different players
converge, and where different strategies conjure different wonders.
So, why the all buzz around forex scalping? For starters, it’s a very risky technique. It is a fast and furious trading technique where an investor buys a currency position and within a short span of time sells it for a small amount of profit. The “scalper” often engages in multiple trades every day to “scalp” profits from every single trade he makes, exploiting the bid-ask spread at every opportunity.
To illustrate, a scalper can buy at a bid price of $5 and within a five-minute trading chart, sells his position for the ask price of $6, giving him a profit of $1. In forex scalping, the trader should be a good speculator of trade movement and should be quick in making decisions. Otherwise, the tables could turn on him in the blink of an eye. Scalpers need to be able to determine and execute trade entry and exit opportunities quickly.
Aside from manual forex scalping, traders also have the option of executing in an automated fashion. For automated scalping, systems are coded into a trading platform to monitor trades on every tick, round-the-clock, and automatically entering and exiting trades based on pre-determined parameters.
For forex scalping strategies to be effective, traders must take advantage of even the slightest price fluctuations as many times as possible. High leverage is also necessary for forex scalping to be successful because the number of pips gained per trade is smaller than in normal trading. This need to use high leverage creates a great risk for traders, which makes it one of the reasons why many brokers prefer to steer clear of scalping.
Decimalization is also posing a disadvantage in forex scalping. With decimalization, prices are now quoted in decimals rather than in fractions. For example, scalpers used to get $62.50 in profits on a 1,000 share trade, wherein a stock is bought and sold at $10. Using decimalization on a 1,000-share trade where stock is bought at $10 and sold at $10.01, profit generated will only be $10.
Spreads may vary depending on the traded stock and its liquidity. The scalper may increase the number of shares that he buys and sells when he realizes that the bid-ask spread has declined, although the scalper should take much precaution when using this strategy because this further increases their risk.
However, when a forex scalping strategy is effective, the scalper is able to enjoy lesser exposure to risk and more opportunities to realize profits. Scalpers have a high potential of making profits quickly because of their willingness to risk more.
Here’s a quick and simple tip for those who intend to try their luck with forex scalping: Using a candlestick chart, sell when you see red and buy when you see green!
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