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What is Forex Scalping?

What is Forex Scalping?

Posted by: Mike Markarian

In forex trading, a trade can go wrong in a nanosecond, and you have only your stop loss to protect you from dire consequences.

One way of managing this risk is to scalp: In forex scalping, a trader opens and closes a trade in less than five minutes – average trades are one to two minutes long. The shorter the time the trade is open, the less chance for disaster to strike.

Of course, it also means that the profit will be minimal. This is why forex scalpers make dozens of trades every day.  

To succeed at forex scalping, you have to be able to make a decision very quickly. But this doesn’t mean that you have to have nerves of steel. What you need, instead, is to have worked out an elaborate trading strategy before the trading day begins.

A forex scalper should make a written, detailed forex trading plan, and then note the complete results in the trading journal. This plan takes into account longer-term trends, and how they will appear in a specific trading period.

The significant danger in forex scalping is one really bad trade. This can wipe out all your small gains amassed during several trading days. For this reason, the successful scalper spends a great deal of time with an eye on the chart, looking for that one clear-cut opportunity for a quick win.

 

This kind of strategy is not really for a beginning trader. Forex scalping requires long experience of what to expect on the market. The beginning trader should concentrate on developing market knowledge with very carefully placed trades. When you have a really good idea of how a given currency pair is likely to react over a period of time, that’s when you should consider scalping.

 

Scalping calls for a good broker

 

Some brokers do not allow scalping. Check carefully with your broker before you start. Others actually support it, so seek those out.

If you do plan to scalp in forex, make sure you have a reliable broker, one who offers tight spreads on a regular basis (the spread between the bid and ask price is what you have to pay before you begin to make any money on a trade).

If you are to trade often for a small profit, the spread is a factor as it takes time to get through a large spread before seeing even a tiny profit.

Watch out for your leverage. Make sure it is adapted to your budget and trading style. Very high amounts of leverage are dangerous in scalping: it’s probably unwise to try more than 50:1.

This may limit your scalping opportunities to some extent if you plan on working with exotic currencies where spreads tend to be wide. If you start out, at least, with the major currency pairs, you are more likely to have opportunities with tight spreads.

There is another good reason to start off your scalping with the majors. The major currency pairs like USD/GBP or EUR/JPY see vast amounts of investment every day from large institutions, professional traders and brokers. This makes for orderly trading, as they remain relatively stable – you are not likely to see USD/GBP go plunging to be nearly worthless. Even a market shock caused by a central bank announcement of something of equal force will not create wild swings.

Carry Pairs and “the Guppy”

Another excellent opportunity for the scalper is what is called “carry pairs.” The term comes from the “carry trade,” which is very popular in Japan among small investors.

In a carry trade, you borrow Japanese yen at a low-interest rate. With these yen, you buy a currency that has a high-interest rate. The interest you earn on the high-interest currency goes to pay off the low interest on the yen loan and leaves you with a profit. Similarly, a carry trade in forex means buying yen at a low rate and then investing the yen in a higher-interest-rate currency. The Swiss franc, another low-interest currency most of the time, is also often used in this kind of trade.

There is, however, one currency pair with major currencies that is famous for its volatility. That is GBP/JPY, commonly referred to as “the guppy” (that is just from pronouncing the letters gup -y).

The guppy is exceptionally volatile, and trading it successfully is one of the excellent skills for forex traders. Profits are high, in that the guppy moves fast. Losses are high too, as you might guess.

A guppy scalper has to get through a large spread based on the volatility of the currency. But if you guess right, your chances of making a lot of pips are strong. It’s probably best that beginners stay away from the guppy, but once you have some experience under your belt, you might go for it. Watch it carefully for a couple of days before you try.

If you are just starting forex scalping, look for range-bound trading. This is the paradise for forex scalpers, as you just keep betting on the observed market movements. Apparently, it never lasts forever, but a short period of scalping in orderly trading can be quite profitable.

Take your time, make a good plan, and go to work.