Scalping in the forex market involves trading currencies based on a set of real-time analyses. The purpose of scalping is to make a profit by buying or selling currencies, holding the position for a very short time, and closing it for a small profit. Many trades are placed throughout the trading day, and the system used by traders is usually based on a set of signals derived from technical analysis charting tools. These tools rely on a multitude of signals that create a buy or sell decision when they point in the same direction. A forex scalper looks for a large number of trades for a small profit each time.
Forex Scalping System
A forex scalping system can be either manual, where the trader looks for signals and interprets whether to buy or sell, or automated, where the trader instructs the software what signals to look for and how to interpret them. The timely nature of technical analysis makes real-time charts the tool of choice for forex scalpers.
The forex market is large and liquid. It is thought that technical analysis is a viable strategy for trading in this market. It can also be assumed that scalping might be a viable strategy for the retail forex trader. It is important to note though, that the forex scalper usually requires a larger deposit that can handle the amount of leverage the investor must take on to make the short and small trades worthwhile.
The hallmark of scalping is lightning-quick trades on the currency market. It's risky, and there are safer strategies that focus on the long run. However, here are the pros and cons of scalping.
The Pros of Scalping
Investors do not have to wait long for a trade to close, which reduces the opportunity for reversals that might harm a trading position.
- It is often employed by newcomers to currency markets because the strategy requires less knowledge of the market and established trading theories.
- Scalping is a good choice for those who hate waiting for a trade to close. Positions are generally held for a very brief timeframe, and that allows for a lower chance of reversals to harm your trading position.
The Cons of Scalping
Many brokers disapprove of scalping, and some trading platforms prohibit the practice. Here are some reasons why.
- Unlike longer positions, one trading loss can obliterate any gains from other several successful trades. Good trades can yield a 1:1 risk to reward or less.
- The profits are smaller on each trade, so it is harder to accomplish your financial goals or to achieve the yields you seek. A “5-pip” yield on a trade is insufficient for most traders.
- Forex traders believe that scalping is simply less profitable than playing a longer position.
The bottom line is that scalping might appeal to your trading style or it may not. Other types of investing to consider are intraday trading and swing trading, which are popular on the currency markets. A good number of brokers would recommend them over scalping.