The Forex is a dangerous market to find yourself in without guidance. In a matter of a few trades you could find yourself up a couple hundred bucks or completely tapped out depending on if the market moves for you or against you. Scalping is one of the valid strategies forex traders use to gain profits. Investopedia defines scalping as,
A trading strategy that attempts to make many profits on small price changes. Traders who implement this strategy will place anywhere from 10 to a couple hundred trades in a single day in the belief that small moves in stock price are easier to catch than large ones.
Here’s a few tips you should be aware of if you’re planning to try scalping as your trading method of choice:
There Is A Time and Place For Everything
When it comes to the Forex, markets are open all day and all night. That does not mean that there is the opportunity for a trade at any hour of the day. Smart traders know that it takes a particular type of market volatility to initiate a price move that would be beneficial to a scalp trade. The best way to ensure that you are in position to take advantage of these movements is to be aware of the open/close times for the major markets around the world and how your chosen pair trends at such a time. With three opening points during the day, it’s relatively easy to find a trade for you.
Average Daily Range
Price swings usually fall within an average range. Sometimes the price breaks up or down depending on extraneous factors or relevant financial news. A wide daily average is ripe to be reaped for scalping purposes. A narrow daily average makes it difficult to find worthwhile trades in a particular currency pair. Watching your daily ranges can give you an idea where the best location for taking profit exists. Even so it involves a notable amount of risk, because of the instability of prices on the market.
Risk management is one of the major parts of being a forex scalper. Dailyfx.com states,
Managing risk is one of the most important skills a trader must learn. This is especially true when scalping short term movements on Forex pairs.
There are a few minor rules you can follow to ensure that you manage to hold on to a gain at the very least. Moving up your stop loss to a point to ensure you at least break even is a good habit. Taking profits at reasonable levels is another convention to follow. Setting unreasonable or fictional levels for your take-profit stops allows for more chance for the trend to turn against you. If the price stagnates, it’s okay to bail out of a trade with what you have. Sometimes you might make a small loss, but it’s better than tying up your capital in a dead end trade.
All in all, scalping on the forex market is a viable strategy for those who have the time and effort to use it. In order to make a reasonable profit off of scalping, you need to use a large volume of trade and a large margin, and in many cases it is this that makes it a dangerous prospect. By using a large margin, it can mean that a couple bad trades can wipe out your entire trading account. Running tight stop loss margins helps to mitigate this, but also serves to minimize the amount of profit you can make. It requires a trader that is versed in reading the market, spotting the turning points and able to make deep technical analysis on a very tight time scale. These things add up to make it a difficult trading system, but if you manage to get it to work and all these are things you can do, it can be a very, very lucrative end result in the offing.