A forex scalper is a special type of investor who focuses on incredibly fast trades in order to quickly capture profit.
Suffice it to say that forex scalping is not for everyone; it can be a very intense and often stressful experience which demands your constant and continuous attention. Nevertheless, it can also be a very profitable and there are certain specific benefits to using a forex scalping strategy that are unique to the foreign exchange market.
Here are the ins and outs of this type of trading strategy and what you need to know…
What is Forex Scalping?
Forex scalping is the act of initiating a trade and then closing it very quickly thereafter. Sometimes this can be seconds, though it’s most commonly minutes.
This takes advantage of the fact that the market does fluctuate and the trade will usually go a little down and a little up just after you’ve initiated it; there is that “wobble” that almost always brings you above a profit margin for some time just before the trade takes its true direction, whether that be profitable or not.
Rather than waiting to see if the trade is very profitable, a forex scalper will simply close the trade the second it has become profitable and exceeded the amount of fees or spread that they need to pay. A forex scalper is essentially a “death by a thousand cuts” kind of strategy; it makes profit a little bit at a time.
Forex scalping is somewhat controversial though forex scalping strategy.
Many traders look down upon this strategy because it is considered to be brute force; it does not take into account many of the traditional technical analysis signals because it’s simply focused on capturing profits as soon as possible and taking advantage of the mechanics of the market. But other traders understand that in the world of trading it’s all about what actually works.
Forex scalping does work. There are downsides and upsides to the strategy, however; it is right for some but not right for others. The main problem of a forex scalping strategy is that it does require that the trader be able to think very fast under high pressure situations. The second that a scalping trade is allowed to “run”, it’s likely the trader will be losing money via forex scalping strategy,
Forex scalping also means that many of the traditional mechanisms used in trading — stop losses and take profits — are used differently. For instance, scalpers will often set their stop losses and take profits very close and they may not set them at all because their strategy requires fine-tuning and control.
The Benefits of a Forex Scalping Strategy?
- You can capture profit fast. Rather than having to wait on your trades developing, you simply close your trades as quickly as you can once you’ve gotten a profit. This also means that you aren’t keeping any trades open, which leads to…
- You have peace of mind. You don’t need to worry for hours or overnight regarding whether your trades are doing properly. You never have trades open for considerable amounts of time; you can close your trades out at the end of each night and rest easy. In other words, you never lose control of your accounts.
- You don’t need technical analysis. Except for the basics, you really won’t have any time to analyze your trades. Most scalpers just operate by going with whatever direction the trade is currently going and just closing it very fast. In this way it is a bit of a brute force technique.
- You can do it at any time. You can hop onto your computer and scalp for an hour or two at the market if you really want to; this means that you have some extreme flexibility. This can be very important for those who need to achieve a good work/life balance.
- You have more cash flow control. Because you initiate a single trade at any given time, you never really risk losing your account — unless of course you’re doing particularly large trades, which isn’t generally advisable. You’ll never be at risk of a margin call even if you have bad days.
- You don’t need to worry about your emotions. A forex scalping trading strategy is generally fast-paced enough that you aren’t going to have time to worry about losing your profits or even gaining it; you simply need to open and close trades quickly. This can reduce a significant emotional component regarding the trades.
- You can make some money very quickly. Depending on your personal strategy, you can make money quickly — you just can’t always make as much as other traders. This creates a more consistent trading strategy even if you aren’t necessarily making it up in volume.
What Are the Downsides of Forex Scalping?
- Brokers don’t like it. In fact, some brokers will actually cancel accounts if they deem a trader to be using a scalping strategy. There are those who look down upon it because it increases fluctuations in the market; other brokers just don’t want to be handling such a high volume of fast and unpredictable trades. On the other end…
- It can be expensive. Every time you trade you need to pay the spread, so that does mean that you have a larger percentage of profit the faster you close the trade (or, rather, the less profit you make per trade). This just increases the risk of the strategy because it means you need to be making more profit consistently each time.
- It requires complete focus. You cannot walk away from your computer while you’re scalping and you need to have very quick reflexes. A single missed second could actually mean the difference between profit and loss. Though people often talk about forex being a fast-paced market, this generally goes above and beyond what others know.
- You need excellent equipment. You can’t have any latency in your trades. Latency occurs in the period after you initiate the trade but before the brokerage accepts it. Some trading platforms have some latency. Some brokers have some latency. As a scalper, you cannot have any delays.
- It can be time consuming. Though you can scalp at any time and for any duration, you do need to scalp more often to build up your income and it is an active experience rather than a passive one. Scalpers may find that they need to spend greater portions of their day scalping.
- You can only track one trade at a time. Along with being time consuming, it means it takes more effort to develop your account. You have to track a single trade at once, so if there are multiple opportunities for profit, you can only capture one.
As you can see, a forex scalping strategy is one of benefits and negatives.
In fact, it’s really ideal only for those who are naturally scalpers at heart. If you enjoy the adrenaline of starting trades constantly and managing them quickly, then scalping is for you. But if it seems too high intensity as a trading strategy, it isn’t likely to go well.
Scalping trading is a very unique strategy that is also considered fairly controversial, but it definitely does get results in the right hands.
Try reading: Identifying the Best Times to Trade Forex