Foreign exchange (Forex) trading uses the difference in currency pairs to generate returns. Traders scalp Forex when they make many small trades on currency pairs following small price movements throughout a trading day.
Traders try to find as many opportunities as possible for profitable trades using technical analysis and indicators. Learn what Forex scalping is and if you should use it as a trading strategy.
What Is Forex Scalping?
Foreign exchange trading is a method of trading based on the exchange rates of currency pairs. For example, one pair is the U.S. dollar and euro. The exchange rate varies throughout the day, depending on a multitude of circumstances.
As the currency pair's price changes, Forex scalpers buy and sell based on small price movements. These traders look for small returns on many transactions throughout a trading day. The difference between Forex traders and scalpers is that traders look for larger returns and are in the market longer than scalpers, while scalpers swoop into an asset, make a trade, and move onto the next one.
How Does Forex Scalping Work?
Traders watch the price movements of their chosen currency pairs and create buying and selling points. When the price meets the criteria for purchasing, they buy a security and then sell when the price reaches aother specific point.
Forex scalpers trade on small price movements, regardless of the size of their position.
This method creates small gains as traders focus on small price movements. Small losses can also occur—sometimes, traders experience large losses and gains. The overall scalping strategy is to create many transactions, each of which generates a small return.
Trading on small price movements is called position trading. When you position trade, you put multiple trades on a currency pair and end up with an average price. To create a position, you identify the currency pair, decide whether to go long or short, and determine the position's size.
In Forex trading, a long position is where you possess or purchase an asset during an upward price trend and hope it will increase in value. A short position is when you purchase an asset during a downward price trend and hope it will gain value.
The size of the position is how many lots you purchase—lots come in micro, mini, and standard lots. You determine the type of position, size, and acceptable risk levels based on your account balance, preferences, and risk tolerance.
What It Means for Individual Investors
Forex scalping and trading are vastly different than investing. Investors place capital into investments for periods of months or years, whereas Forex traders load a trading account with a broker and make trades in increments of minutes or days.
Forex scalpers should try to trade currency pairs that have high liquidity so that can get out of a position quickly.
The shorter trading time frames require much more attention from traders than investing requires. Some traders prefer to have their brokers or expert advisors present them with trading signals so that they can decide to make a trade or not.
Others prefer to use automated trading software, which lets traders set trading parameters. Once they set up preferred pairs and their buy and sell criteria, the program conducts trades for them.
Whichever method a trader uses, it still requires more attention than traditional investing. Traders have to be ready to make adjustments to their automated criteria or be prepared to deal with trade messages and alerts at any time throughout the trading day.
Requirements for Forex Scalping
To trade Forex, you only need to open an account with a Forex broker and place money in it. You can begin trading as soon as you have money in the account and set up the platform. However, there are several concepts and practices you should become familiar with before trading.
The currency pair you trade determines the best time to trade. However, there is no reason to try to trade outside of the hours of operation of the three main sessions—Tokyo, London, and New York.
It's essential for Forex traders to learn how technical analysis works. Technical analysis uses charts, patterns, and other indicators to analyze and predict the price movements of an asset. Some examples of the methods traders use are the candlestick patterns, chart patterns, or indicators.
Candlestick patterns are charts that follow the general price trends of an asset and give a visual indicator of the opening, closing, high, and low prices of the investment per day. They are called candlesticks because of their appearance.
Chart patterns are visual indicators of multiple days' prices. These patterns are named for the appearance they take, such as the cup and handle or inverse head and shoulder patterns. Traders accept the chart patterns as indicators of the action prices are going to take next.
It's tempting to make large trades for fast money; however, this is the road to ruin. Trading stops tell your broker that you only want to lose a certain amount of money on any given trade. When you place a stop, it keeps a trade from occurring if the loss is outside your acceptable limit. Trading stops provide a means to prevent large losses—set a stop that is the maximum you can lose on a trade, and don't change it.
You should be able to control your emotional reactions and keep a cool head when prices are climbing or falling. Sticking to your plan and not falling prey to greed can help reduce the risk of losing large amounts of capital. Keep your trades small and give yourself some room to get out without losing everything if you make a mistake.
- Forex scalping is trading based on small price actions.
- Forex scalping works by trading on positions.
- Trades can be automated or conducted manually.
- Forex trading should only be done by someone who has studied the Forex market, techniques, and concepts.