What Is Forex Scalping? Idea, Setups, and Drawbacks
All trading strategies can be divided into general approaches that Forex traders use. Strategies that include 1 to 15-minute timeframes, short-term trades, and high volatility are a part of the scalping approach.
What is scalping in Forex trading, and how can you apply it to your trading plan? Read on to find the answer.
Scalping in Forex: Definition
Scalping in Forex means opening numerous trades within a short term — scalpers trade on 1 to 15-minute timeframes so that a position can be closed within a maximum of a few minutes. The idea of scalping is to gain a tiny number of pips per trade as often as possible to turn small profits into significant gains.
Note: remember that trading isn’t only about profits. Even when opening short-term positions, you may bear losses that will remove all profits.
You may ask what the point is of opening numerous small trades that add to commissions if you can open a longer-term position and potentially gain more while risking less and paying lower fees. The thing is that more significant price moves are less frequent. A trader uses the scalping method to catch all possible trading opportunities.
Some traders confuse scalping and day trading because they share the same idea — a trade should be closed the same day it was opened. Moreover, scalping is also considered a day trading approach. Still, scalping is just a part of day trading, while day trading is a more comprehensive method that implements trades that last not only from several seconds to several minutes; they can be kept open for several hours.
How to Use Scalping in Forex
Scalping only works on highly volatile markets. Can you imagine that a scalper may open over 100 hundred trades within a day? As scalping requires a price to move significantly so that a trader can take the most of it, not all markets will suit this approach.
High Volatility
High volatility involves increased risks. Still, it’s the only option for a trader to gain on short-term trades. High volatility allows scalpers to go long, close the position quickly; go short, close the trade quickly; then go long again, and vice versa.
Markets experience high volatility around important market events. Economic data releases are the primary trigger for currency pair price fluctuations.
Tight Spreads
A bid-ask spread is a vital part of the Forex scalping system. The spread is the difference between the bid and ask prices. The ask price is the price at which you buy. The bid price is the price you sell; it’s almost always lower than the ask price. For example, if you open a buy position on the EUR/USD pair that involves a 3-pip spread, you are already in a 3-pip loss because the buy trade is closed at the bid price.
As scalpers close trades within a few minutes, the spread size is vital for them. If we consider the same example, a scalper will need a price to rise fast so that the bid price is above the ask price at which they went long.
The spread size depends on market liquidity and the broker you choose. For example, on FXOpen, you can start trading Forex with spreads from 0.0 pips.
Liquidity
Also, it’s vital to choose liquid markets. Liquidity determines whether the trade will be executed at the desired price and with a low spread. A position is executed only after the expectations of the buyer and the seller regarding the price match. Liquid markets have lots of market participants. Therefore, the risks that a seller won’t meet a buyer are low. If the market is illiquid, it may take time for a trade to be executed. Sometimes, it can be closed partially or fully cancelled.
Scalpers often choose major pairs because they are liquid markets. You can use volume indicators to determine whether the market is liquid, as high volumes accompany high liquidity.
Busiest Time of Day
Although it’s said that scalpers should spend hours in front of the monitor to catch attractive trading conditions, they know when it’s worth expecting scalping opportunities and when the market will likely be calm.
The highest level of liquidity usually appears during session overlaps. Let us remind you that there are four key trading sessions, which are Sydney, Tokyo, London, and New York, and they change around. Overlaps are periods when two of four sessions are open.
Tokyo and London sessions overlap from 3:00 to 4:00 AM ET during summer, while London and New York sessions overlap from 8:00 AM-12:00 PM ET during summer and winter.
Advantages and Pitfalls of Forex Scalping
Every trading method has benefits and drawbacks.
Advantages
- Short-term trades. FX scalping allows traders to open positions frequently and quickly due to the short period of positions.
- Numerous opportunities. As short-term price fluctuations occur more often than longer-term moves, scalpers can find opportunities for trading in almost any market.
Pitfalls
- Experience. Scalping is a risky approach that requires lots of skills and knowledge. If you don’t feel confident, you shouldn’t use this method.
- Time. Scalpers may spend hours in front of the monitor to catch significant price fluctuations.
- Large sums. To make the scalping technique in Forex effective, a trader needs to have significant funds. Therefore, traders use leverage. At FXOpen, you can trade major currency pairs with leverage up to 1:30 (1:500 for Professional clients, or clients at FXOpen INT).
Note: leverage increases not only profits but also losses. Perform comprehensive research on the topic before using this tool.
How Can You Succeed in Scalping?
To succeed in scalping, you need lots of practice. To gain experience, you can try a free demo account. Also, there are numerous Forex trading scalping strategies you can start with before you develop your trading method. Some of them can be found in our articles “3 Effective Scalping Strategies” and “Three Working 5-Minute Trading Strategies”. If you feel confident, you can start practising on the TickTrader platform.
Read more: https://fxopen.com/blog/en/what-is-forex-scalping-idea-setups-and-drawbacks/
Text source: Forex Trading Blog
