What is scalping in Forex? Is scalping strategy reliable? What are the risks of a scalping strategy? Which traders should use scalping? Is scalping illegal? Which brokers are more suitable for scalpers? What are the advantages and disadvantages of scalping? I’ll try to explain all of them in this article.
Scalping is a type of popular trading strategy in forex markets and investors who are using this strategy called by “Scalpers”. The main purpose of scalping is getting small profits with the help of the high leverage and higher trading volumes in very short time frames.
Many traders are using scalping strategy in forex. Specially on important data releases like non-farm payrolls or central bank monetary policy decisions. For example, let’s say a trader bought 0.10 lot of EURUSD at the exchange level of 1.1500 and waited till the price hit at 1.1600 (50 pips). As a result, the trader would have earned $50 profit right? Instead of this, scalpers prefer to purchase 1 lot of EURUSD and just wait for EURUSD to rise from 1.1550 to 1.1555 (5 pips) to get $50 profit.
While choosing a broker, the most important factors for the scalpers should be regulation, maximum leverage ratio, execution time speed and spreads. Because in order to open high volume trades, you will need high leverage. Also, spreads must be very low, because like I said, scalpers generally seek 5-10 pips profit. If the spreads are high, then you may have to wait for 15 or 20 pip to close that trade. And as a result, that will be no longer scalping.
Scalping can be a very risky strategy because traders have to trade with high volumes in order to get reasonable profits. Traders usually close their transactions with small profits and holding only one losing position too much, can erase all the profits. Both fundamental and technical analysis must be done and also market volatility must be high for scalping. In order to avoid large losses, scalpers’ risk management must be very good.
Scalpers think trading in the short term always more profitable than trading in the longer term. Because waiting too much in one position without taking profit can end up losing money. Instead of this, catching 5-pip price moves with 1 lot of the transaction for 5 times means $250 profit.
If you want to try scalping, I recommend you trade major currency pairs like EURUSD, GBPUSD or USDJPY. Volatility generally higher in Europe and US trading sessions. That’s why I recommend you try scalping in these sessions. Also, choosing a chart time-frame is very important. Scalpers usually use one-minute or five-minute charts while trading. Thus, they can able to see small price moves better.
Also, scalping strategy can be automated. If a scalper sits in front of the computer and open/close transaction by himself/herself it is called manual trading. However, in an automated system, a trader uses software (trading robot) that open trades by itself according to scalping strategy of the trader. Forex robots or expert advisors remove negative psychological elements while trading but also ignores all fundamental factors. That’s why automated scalping strategy may be faster than manual but it is riskier.
This technique is a good beginning for scalping. But, you need couple of hours to realize this technique. So if you don’t have the time, you might want to look for other methods. Since you will make many trading operations in a day, it’s crucial to find a broker that will offer you tight spreads and low commission fees.
Advantages and Disadvantages of One-Minute Scalping Technique
Advantages:
- Less Risky
- You can still earn a lot of money although the markets
Disadvantages:
- Large fund is required
- You must be good at mathematics and have strong reflexes in One-Minute scalping
- You need to spened many hours
Is forex scalping illegal? People usually ask me this question, but in fact there isn’t a certain answer to question before defining the types of scalping.
Arbitrage
Arbitrage is one of the methods that you can’t earn money with. After a broker realize that you are making profit by arbitrage, they may not the money you earned. Because these types of profits often made by small differences in prices of different brokers. Since this price differences formed by technical problems. Brokers think that it’s not fair to misusing of this technical issue and making money from it.
Churning
Churning is another type of scalping that forex brokers doesn’t let. To use this method, you should bring a customer to a forex broker company that will grant you for doing so. When your friend enter thousands of trade every minute, you will get a commission by that. Even if your friend lose all the deposit, theoritically the commission can surpess the losses, thus you make profit. So scalping isn’t illegal unless you use the methods i mentioned above.
- You should know the spreads of relevant trading instruments to scalping
- It’s good for you to follow the analysis and economic developments
- You need to learn technical analysis and indicators that is most suitable for scalping
- While trading, you have to determine take profit, stop loss levels
- You have to follow actual financial data
