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What Is Scalping in Forex Trading ?

Forex scalping is essentially a strategy that traders use to avoid spending long hours in front of the trading terminal. The sizes of the lots used for forex scalping are larger. It involves opening positions in quick succession and closing them soon after. Scalping transactions range between 2 and 15 pips per transaction and result in high profits. However, this technique is best advised to be used by experienced traders rather than beginners as these transactions require some amount of skill and self-discipline. The risk of loss is also high. Those traders that are not in control of their emotions are advised to avoid scalping and look at longer duration and safer trades.

Though forex scalping transactions vary between just a few seconds to sometimes 3 and 5 minutes, typically, traders maintain the trade position for about a minute. During forex scalping, traders increase their pip per dollar value so that the profits generated equal that made from many transactions with a lower pip per dollar value. The risk is higher in the former case.

Beginner traders that are interested in using forex scalping are best advised to use low-volumes to mitigate the risks involved. Though forex scalping transactions are theoretically supposed to take up less time than their traditional long-term counterparts, if the aim of the trader is to generate more profits and reduce the losses, then traders may have to spend additional time to place more orders.

Another strategy that traders use while scalping is placing of tight stop loss limits to prevent negative downslides. However, when the limits are tight, it translates to a very limited number of transactions that the traders can place even when the prices move in a direction favorable to their expectations. This can increase the loss potential.

This article aims to provide some tips to the beginner forex traders who would want to use the forex scalping techniques to their advantage.

For a beginner forex trader trying to implement the forex scalping strategy, it is important to choose trading currency pairs that have low spreads and high liquidity for the first few transactions. Examples of currency pairs that have the lowest spreads and highest liquidity are EUR/USD, GBP/USD and USD/JPY, among others. It is also important that they place trades with a broker that offers live data feeds.

Popular notion is that it is easy to make profits by using the forex scalping strategy. Though it may be true, traders must give some thought to the high risk potential of these transactions as they can lead to huge losses.

Read on to know about some of the advantages and disadvantages of forex scalping.

Advantages

The basic advantage of using forex scalping is that the trader can make a considerable amount of money in a short period. There will be many opportunities in a day when a trader can use forex scalping. Further, a trader can trade in several different markets simultaneously. Additionally, traders can trade with the help of simple systems such as support and resistance breakouts.

Disadvantages

As the potential for loss is very high, the number of transactions that generate profits should be considerably higher than the loss making ones. The trader must be very attentive as the trades last for very short periods. The trader should be capable of withstanding a lot of pressure when using the scalping strategy. The risk-to-reward ratio is always in a direction that poses a disadvantage to the trader. This is because the stop-loss set up is bigger than the take-profit limits.

Listed below are six tips for a beginner trader interested in using the forex scalping strategy to generate higher profits. Some basic points to keep in mind at this stage are that forex scalping uses short-term transactions to rake in the profits and a trader cannot rely only on one’s own intuition or luck to bring in profits or maintain positive outcomes every time or for a long period.

Tip #1: Forecast, analysis and money management are important factors

To bring in the profits for a longer period of time, the trader should be able to manage money and perform technical and fundamental analyses in a proper manner. These factors combined with the flair and intuition of the trader brings in optimum results.

Tip #2: Extensive knowledge about trading instruments is recommended

For bringing in long-term profits, the trader should have thorough knowledge about the instrument that is used for trading. The trader should be informed on factors such as the volatility in the market, factors that affect its price and the direction in which it is likely to move.

Tip #3: Be aware of sharp price variations

It pays to keep track of sharp variations in prices that occur in the market rather than track the slow price movements. This is recommended for stocks, commodities and currencies. Sharp price variations are indicative of market volatility and liquidity shortages of the currency leading to price imbalances.

Tip #4: Tie up with brokers that offer leverage facility

Some brokers offer leverage for beginner traders. By tying up with a brokerage house that allows traders to use larger sums for trading than the initial amounts that they invest, then it is a good idea to take advantage of this facility. Leverage ratios of 50:1 and 100:1 are common, though some brokerage houses offer up to 800:1. However, in this context, it is important for the trader to understand that the risk increase is directly proportional to the leverage that is offered.

Tip #5: Use fundamental analysis

Application of fundamental analysis as a tool for the beginner trader is useful because it helps the trader gain a firm understanding of the economy and the trading instrument’s evolution and position in the market. It also helps the trader to study the effect of one-off/occasional variations of price movements of the instrument. The best results and maximum profits are obtained when the trader combines this with technical analysis.

Tip #6: Choose a suitable strategy

Forex scalping is not recommended for beginner traders. To execute profitable trades, beginners can use many other tools that are automated. It is recommended that the beginner trader first becomes familiar with all the available tools before starting to use a suitable trading strategy to bring in more profits. It is also true that some experienced traders use only manual tools to execute trades instead of automated ones.

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