What is Forex Scalping?
Scalping is a trading strategy whereby a trader tries to profit on small price changes. The main goal of scalping is to buy or sell a number of shares at the bid or ask price and then quickly sell them quickly for a few cents higher or lower. Numerous small profits can add up into large gains.
Scalping is an approach that directly opposes the approach used in stock trading which attempts to optimize positive trading results by letting profits run their course while increasing the size of winning trades. Scalpers profit because they are willing to accept many smaller profits rather than a few larger wins. A successful scalper will have a much higher ratio of winning trades versus losing while keeping profits roughly equal or slightly larger than losses.
The Scalping Process
Forex scalpers will stay in the market no longer than five minutes at a time and place up to a few hundred trades daily. The average trades tend to be 1-2 minutes. Forex scalpers believe that if a trade moves in the direction not anticipated, they can move out quickly rather than staying in and waiting for the direction to reverse. Small moves in prices are easier to catch than large ones.
Because the Forex scalper aims to make only a few pips per trade, it is essential for a trader to use a broker with low spreads and instant execution of trades. But not every Forex trader has the right qualities to be a successful scalper. A Forex scalper must be able to take small profits as they come and not wait for the larger ones. He must remain calm and be able to make prudent decisions in a split second. Opportunities disappear in a second and spending too much time thinking about the next move will lead to loses.
Successful scalping demands a great deal of focus and attention. A Forex scalper should always keep up with news releases and financial reports from around the world. A country’s political and social events influence the country’s local currency and affect the movement of the currency pair. Keeping track of the positions of the currency pair from previous days will show the scalper what trend the price movement is taking.
How Scalpers Gain an Edge
One advantage to Forex scalping is that targets of 5-15 pips are not difficult to reach. The downside is that the risk-to-reward ratio is lower than with other Forex trading methods. Since the profits per trade are small, losing even one trade can remove any gains seen in the course of the day. Setting a stop loss is one way to prevent this from happening.
Forex scalpers should not take random profits even if they were initially profitable. This can only encourage the scalper to take more risky trades which most probability will result in a loss.
Also, Forex scalpers should never try to make up the losses from the previous day. This usually will never happen and thinking about it leads the scalper to make emotional moves that are not always wise and are doomed to fail.