There are numerous reasons why forex trading is so popular, from the liquidity offered by major currency pairs and the inflated leverage that’s available to investors.
The highly leveraged nature of forex can be attributed to the fact that currency trading is margin-based, while it’s also interesting to note that global currency pairs can also be traded as derivative assets.
It also creates the opportunity to engage in ‘forex scalping’, but what exactly is this process and when is it a viable idea?
What is Forex Scalping and How Does it Work?
In the investment realm, scalping is a term used to denote the ‘skimming’ of small profits on a regular basis.
Such profits are earned by moving in and out of positions several times per 24-hour period, which optimises the derivative nature of forex and makes it possible to accrue income without assuming ownership of the underlying assets.
Scalping in the forex market involves trading currencies based on a set of real-time analytical data, which enable investors to execute orders throughout the trading day based on clear technical indicators and detailed charting tools.
This also creates a greater balance between risk and reward, as it enables traders to minimise risk while simultaneously profiting from the inherent volatility that underpins the forex market.
But how exactly does this practice work and how is it different from day trading? The fundamental difference is that day traders will typically change their position once or twice during a typical session, scalping is far more frenetic and involves a higher volume of trades and movements.
In this respect, scalpers tend to trade directly off of tick and one-minute charts, which enable them to accurately identify high-velocity price shifts that are likely to follow the release of economic data and breaking news.
From this foundation, scalpers will attempt to scalp between five and 10 pips from every single trade that they make, before repeating this process on multiple occasions throughout the day.
To Scalp or Not to Scalp – What do You Need to Know?
One of the main challenges associated with scalping is its frenetic nature, which leaves little time to perform in-depth or detailed market analysis.
So, you’ll need to have a viable, trusted and repeatable system that allows for the execution of quickfire and automated trades, whether this involves automated to algorithmic elements or not.
You’ll definitely need to rely on clearly visible and short-term charts (such as the tick charts referenced above), with the five-minute chart the longest you could possibly use in this instance.
When it comes to timing, scalping is best performed during periods of peak trading volumes and liquidity. Such factors translate into higher levels of activity and volatility, creating more price movements to target within a relatively short period of time.
Similarly, you should only trade the major currency pairs when scalping, as these are the most liquid assets and often adhere to predictable trends.
However, you shouldn’t scalp without the requisite understanding or trading strategy, no matter how much volatility the market is experiencing. We’d also recommend that you stop scalping if you’ve incurred successive losses, as it may be better for you to bide your time and regroup before committing more of your hard-earned capital.