DEFINITION of Forex Scalping
Forex scalping is a trading strategy used by forex traders to buy or sell a currency pair and then hold it for a short period of time in an attempt to make a profit. A forex scalper looks to make a large number of trades and earn a small profit each time.
Because the objective of a forex scalper is to make a small amount from many trades, the scalper holds onto these trades for a matter of seconds.
BREAKING DOWN Forex Scalping
For the most part forex scalping involves large amounts of leverage so that a small change in a currency equals a respectable profit. Forex scalping system strategies can be manual or automated. A manual system involves a trader sitting at the computer screen, looking for signals and interpreting whether to buy or sell. In an automated trading system, the trader "teaches" the software what signals to look for and how to interpret them.
It is thought that automated trading takes human psychology out of trading, which is vital in forex scalping because the fast-paced environment can be hard for traders to stomach. As technology and electronic trading has grown, forex scalping by individuals has become less prevalent. Quant traders have built systems that can do thousands of trades per day making manual trading obsolete.
Forex scalping can be most lucrative around periods of high volatility and significant market moves. Scalping can be particularly popular leading into and after important data releases such as the U.S. employment report and Federal Reserve meetings.
Scalping does come with risks. Should a trader enter a position which they can't exit, they can be left with an open position that could potentially wipe out some profits.