Forex Scalping: Risk In The Foreign Exchange Market

learnforextrading“Scalping” is not exactly a neutral term; part violent act, part desperate concert goer, scalping also happens to be a type of strategy used in the foreign exchange market (forex). And when it comes to forming opinions and tactics concerning forex scalping, those aren’t neutral either. While scalping is legitimate in the sense that you can make money doing it, it presents what many believe to be a disproportionate amount of risk (“risky,” ironically, is exactly what proponents of forex scalping claim it is not).

Below I review the basics, realities and risks of forex scalping and let you decide just how viable the strategy is. If you want to learn about other, perhaps more legitimate methods of profiting from forex, check out this five-star comprehensive forex mastery program.

What Is Forex Scalping?

Scalping in trading is metaphorical of the “part violent act” I mentioned above; essentially, a thin sliver of profits is skimmed off the top by going in and out of positions very quickly. Think of it as day trading on a minuscule time scale. You would not, for example, hold a scalping position overnight or even through sequential periods. Many scalpers are entering and exiting positions within a matter of minutes, sometimes even seconds. The most intense scalpers go into a frenzy when economic data is released, trying to time a ridiculous number of trades around a very small target.

The Bright Side

The bright side of scalping is that reasonable amounts of money can be made on very small fluctuations. This is accomplished by using an extremely large amount of leverage, which can turn a few pips into a reasonable profit. If you find a favorable trade, there is also the benefit that you can repeat the trade over and over because you are making it on such a small timescale.

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How It’s Made

For example, let’s look at how a scalp actually works. If you haven’t clicked on the pips link above, I will explain very quickly: a pip is the smallest unit of measure by which an exchange rate can fluctuate. In the case of the U.S. and Canadian dollars, this is 0.0001, or one-one-hundredth of a percent (that, then, is the value of one pip).

The second thing we need to look at is a standard lot. A standard lot is simply 100,000 units of currency. In the case of the U.S. and Canadian dollar exchange, a standard lot would turn one pip into a $10 profit (100,000 x 0.0001).

Now all that needs to happen is an ideal trade; in the world of scalping, this would be roughly five pips, but any trader would welcome even a pip or two. But a five pip increase using one standard lot would result in a $50 gain. You can see how if you could make a hundred of these trades in a week, you could net total gains of $5000.

The Truth: Part 1

The cold hard truth is this: scalping, like so many forms of trading, can sound incredibly appealing in theory. And these theories are designed to make trading sound easier; to make it sound as if a certain strategy gives you an advantage in the market; to sound as if it is a new, promising avenue for the average person to get rich.

Scalping does not make trading easier. If you aren’t a good trader, you won’t be a good scalper. It’s as simple as that. To make money, you still have to make the right picks. Things like lower risk, higher leverage, etc. have no affect whatsoever on any one person’s ability to pick winners. Get some real advice with this easy forex and futures trading course.

I admit there are times when scalping is more likely to be profitable, such as in ranging markets and divergence trades, but this brings me to Part 2 of our truth segment.

The Truth: Part 2

Just like some people are born to be professional athletes, some people are born to be scalpers. You have to be borderline neurotic to make it work. You have to stay glued to your chair throughout the duration of a trading session, and you have to be able to hold your concentration throughout it, as well.

Think you can handle that? How about trading without thinking? Yup, that’s pretty much what you have to be willing to do; the smaller the pip spread you’re willing to deal with, the faster you have to respond to changes in the market. If you like to plan out your moves, analyze a variety of variables and trends, you won’t last a day scalping. When things move, you have to be ready to act within seconds.

If you’re thinking, “Well, if I miss out on a little bit of profit, no big deal.” But it’s a double-edged sword. When the trade starts going sour and pips start falling, you have to be there to cut it loose; if you don’t, your losses are going to skyrocket.

But just because scalping is difficult doesn’t mean you should turn your back on forex. Read this blog post for ideas on forex trading strategies that actually work.

Other Important Factors

If you’re an experienced trader looking for something a little more exiting, maybe scalping is for you. You still will want to be sure of several things:

  • The forex market is unregulated. It is therefore essential that you trust your broker and understand every last word of every broker agreement you make. People will scam you, so read carefully.
  • You must be knowledgeable about trading platforms. If not, try using a practice account first to get the hang of it.
  • You have high performance, reliable access to the market, allowing for immediate buying and selling.
  • Search out the most liquid markets. These are your best friends.
  • Do your research. Follow the trends (at least to start). Stick to major currencies.

If you want to get serious about trading in forex, and I mean doing things far beyond scalping (there are many other, perhaps more legitimate ways to trade in forex), I highly recommend doing it the right way and investing in a complete Forex trading system, like this one available here at Udemy.