Sunday, 27 September 2009

Scalping in Forex trading

Scalping in Forex trading

When trading in Forex, one needs to adapt various strategies based on the expected profits and the involved risks. Traders, for quick profits, adapt Forex day trading. Yet, we have another trading strategy, the Forex scalping strategy, through which more money can be earned than day trading. It is based on the short-term changes in the rates of the currency pairs often traded by scalpers.

Scalping strategy means buy and sell within just few seconds or at the most couple of minutes. The positions are not maintained for long and have to be closed in not more than 1-2 minutes. The strategy uses a lot of market leverage and more leverage can reap more profits. The leverage risk involved is high, yet the scalper can benefit out of the low exposure risk. The position is not held for long. Hence, the market exposure risk is lower as compared to the other strategies. If a scalper knows to properly scalp trades, he can reap benefits those are not present in the “day trading” too.

In scalping, scalpers usually benefit from the small pip movements. Scalpers generally make around 1-5 pips behind each trade. And in a business day, a scalper can do 100-200 such trades. For a standard lot of trade, each pip is valued at $10. So if trade gives scalper 5 pips, he can easily get $50 behind one trade! And imagine he does 100 such trades; his per day earning can be $5000! Each trade doesn’t take more a minute or two. So isn’t $50 great money for a work of 1-2 minutes?

Scalper’s way of trading doesn’t go down too well with the dealers or brokers. The main trigger for the hatred is the time behind each trade a scalper takes to exit. Scalpers exit the trade even before the dealing desk captures and executes the same. The issue arises in the case of brokerage the scalper needs to pay. The solution is the ECN brokerage system where the scalpers evade the dealing desk and trade directly with each other. Scalpers benefit because the brokerage costs are less in ECN than dealing desk. But in turn, the pips spread is also constricted.

Hence, a scalper should plan his strategies focusing on the risk management behind the short trades. The losses matter more than the profits. Hence scalpers should implicate stop loss orders, whenever required. It is an accepted fact that scalpers mint more dollars than day traders, though they attract higher degree of risk too. It also is stressful considering the time behind each trade that a scalper stays in.
Forex scalping is considered as an effective and quick way to earn money in short time span. This strategy has gained the likes of many, yet turns out to be a controversial one. Many get into this because it demands lesser initial investment. Many factors have made scalping popular as day trading. Concerns really are sidelined, when one thinks of the profits that scalping can give anyone