What is Forex Scalping?
Forex scalping is a popular forex trading strategy where the trader makes several small trades in the course of a trading day. Compare it to the game of baseball, where a team is said to play ‘short ball’ making hustles and stealing bases, doing many small plays instead of going for the home run. Forex scalping is like that. Scalping is a quick, adrenaline filled way to trade and not for the faint of heart. It does allow for some quick profits. Though many scalpers will disagree, this method of trading has a higher risk-reward ratio than more conservative trading. To counter this, most traders use tight stop loss limits to prevent big losses. The benefits of scalping is quick profits and peace of mind when the day is over as there will be no outstanding trades. The drawback is the difficulty involved and the cost of scalping which can be high with a broker with high commission.
What Time Frame Is Used in Forex Scalping?
Scalpers need all the up to the second information they can get and therefor use very short time frames on their charts such as ticks, 1, 3 and 5 minutes. The purpose is to spot easy and quick entry and exit points. Scalpers thrive on high liquidity and do not look for long term patterns. This is why the short time frame is preferred.
How Much Is Invested In Each Trade?
Since scalpers deal in very small pip ranges, they need to increase the amount invested in each trade. Compare it like this: 150 pips x $2/pip = $300 profit (two hours to complete this transaction) or
5 pips x $60/pip = $300 profit (5 minutes to complete this transaction). As you can see, scalping is high risk – high reward. Combine a scalping strategy with high leverage and you have a potent combination for boom or bust.
What Are The Benefits of Forex Scalping?
Since scalpers are willing to take relatively bigger risks on each trade, they can also make more money. It happens much more often that the market moves 5 pips than 150 pips, which means scalpers can take home profits several times a day if done right. Scalpers usually go for profits anywhere between 2-15 pips, which combined with leverage can make for very healthy profits.
What Are The Negatives of Forex Scalping?
Scalping carries more risk than conservative trading as the amount invested pr. pip is greater. This means that it is crucial with proper stop loss management. As all traders know, that is easier said than done. Scalping is definitely not for the timid. Also, forex brokers do not particularly like scalping because it costs the money to execute a trade. Some brokers counter this with high commissions that make it difficult to be profitable.