Scalping is when a trader enters and exits a market quickly multiple times a day. The goal is to make small profits that accumulate, and a trader who scalps is called a scalper. Scalpers take advantage of small price movements throughout each day and never hold their positions overnight. Their trades can last anywhere between a few seconds and an hour, and it all depends on the opportunities that present themselves.
Why do people scalp Forex?
The Forex market is the largest and most liquid market in the world. Depending on the currency pair you choose to trade, you will find that there are many active participants daily. This means exchange rates are always in flux. For scalpers who take advantage of market movements, the Forex market offers plenty of opportunities.
The Forex market is also unique in that it is open to retail traders 24/5. It is closed only at weekends (for retail traders). This means there are plenty of opportunities for traders round the clock on weekdays, which gives scalpers big windows of opportunities to participate in the market.
Benefits of scalping Forex
There are several benefits to scalping Forex.
No positions held overnight
One of them is the fact that scalpers never hold their positions open overnight, which means they never have to incur overnight charges. This is a great advantage depending on the broker you work with, as some brokers can cut deep in transactional fees.
No risk of slippage overnight
Another advantage is that traders do not have to worry about the market being in flux over the weekend. The Forex market is open 24/5, and it is closed to retail traders on weekends. When scalpers ensure they close their positions before the end of the day, they can ensure they do not risk their capital via slippage.
Low starting capital
A third advantage is that of being able to participate in the Forex market without a large starting capital. Scalpers rely on market movements and the use of leverage when trading Forex. This means they can either accumulate their gains slowly or they can use leverage to increase the size of their positions. Either way, they do not need a huge amount of working capital to begin trading.
No technical mastery required
Finally, an advantage of scalping Forex is that there is no need for a thorough education and grasp of technical analysis. Scalpers take advantage of market movements and fluctuations as they arise. This means they rarely need to consider the big picture of where the market is going or identify trends. Instead, they trade at the moment and attempt to make gains based on second-to-second or minute-to-minute movements.
Risks and limitations of scalping Forex
Nevertheless, despite the benefits of scalping Forex, there are limitations in the trading method.
Scalping is demanding
The first limitation of scalping is that it can be an incredibly demanding trading method. This is because scalpers depend on making profits from small market movements and can make up to hundreds of trades a day. This requires a trader to sit in front of their computer or device to monitor the market situation closely. Certainly, not everyone can afford to do this. For example, if you have a full-time job or have caretaker responsibilities, you may find scalping impossible.
Potential high transactional fees
Another limitation that a scalper may face is of high transactional fees. Some brokers charge a commission or a fee for every trade a trader places. This is hugely counter-intuitive for scalpers, as they can place hundreds of trades a day. These fees can then eat into their profit margins substantially.
However, traders can mitigate this limitation by ensuring that they select a broker with reasonable fees. There are also brokers who choose not to charge transactional fees or brokers who offer to waive fees or implement a sliding scale system for high-frequency traders. The main point is to find the broker that suits your needs so you can make the most of your trading.
Scalping is risky
Next, scalping is risky. Many of us are no strangers to the saying that it is much easier to spend time in the market than to time the market. In other words, it is much easier for traders to invest their capital and ride out short-term volatilities than it is for them to go in and out of markets. Scalping is a riskier endeavor compared to most other methods of trading because it spans such a short period.
Strategies for scalping
If you are looking to hone your trading skills and learn to scalp, there are a few strategies you can learn. To simplify them, there are a few broad categories of strategies.
The first is trading trends. Traders who choose this type of strategy will need to understand technical analysis and understand indicators and signals to identify trends to trade them.
Another example is countertrend trading. Traders will also need to understand technical analysis, only because they need to go against it when they trade. Traders trade countertrends when they anticipate the market will reverse.
Finally, traders may select a range in which they trade by identifying support and resistance areas. They attempt to buy near support and sell near resistance, to profit from oscillating price movements.
How to determine if you should scalp
If you are interested in scalping, you may be wondering if it is suitable for you. In this situation, you can ask yourself some questions that can bring you clarity:
- How much risk can I stomach?
The first and most important question is to ask yourself questions related to your risk appetite. You must know how much risk you can tolerate and what you are comfortable with. Scalping is relatively risky, so if you prefer a more stable investment, you may choose a longer trading timeframe, such as swing trading or position trading.
- What is my preferred trading style?
Next, you should consider your preferred trading style. This is how you prefer to trade, your trading habits, and what makes you most comfortable. For example, are you easily stressed by spontaneity and prefer to make plans ahead of placing trades? Are you comfortable with jumping in and out of the market within seconds? Do you thrive on the thrill of trading quickly? These are all important questions that can help you gauge your suitability to scalping.
- Do I have time to scalp?
Even if you do enjoy the thrill of scalping, you should ask yourself if you have time to scalp. This is a trading method that requires a certain amount of dedication. You will need to keep an eye on the market closely, and you cannot do this if you have other full-time commitments. Scalping also requires consistency, so you will need to ensure that you have a consistent schedule that is suitable for it.
- What currency pair do I want to scalp?
Finally, consider the instrument you want to trade. If you intend to participate in scalping, you will need to select an instrument that is liquid enough to experience price movements daily. If you plan on trading major currency pairs, scalping may be for you. However, if you plan to trade exotic currencies that have little market movement throughout the day, it may not be for suitable for scalping.
Many intermediate traders take up scalping for its potentially lucrative opportunities. Scalping does offer plenty of upsides, but it can be risky if traders are careless with their capital. The best you can do is answer the above questions honestly and ask yourself if scalping is really for you. You should also do well to remember that profits are not guaranteed, and you should do your research before participating in the Forex market.
If you would like to read more about Forex, make sure to check out how to deal with losses and how to win as it is an informative article that will sharpen your forex knowledge and prepare you for greater wins in the future.