Forex Scalping: A Fundamental Explanation
By: Hillel Fuld
Forex scalping caused a lot of hype recently with new FIFO NFA ruling. Many Forex traders use FX scalping as their primary trading method. However, Forex scalping trading is not for everyone, but it is suitable for a very specific type of trader.
What is Scalping?
Forex scalping is the trading method by which the trader makes quick and small profits by opening and closing new positions within minutes. A scalped trade can remain open for three to five minutes, with the majority of such trades staying open for as little as one minute. Scalping FX is a popular trading method primarily because the inherent risk of Forex is minimized when scalping. Since trades are only open for a minimal amount of time, the danger in a fluctuating market is much lower than in traditional trading methods due to a lower level of market exposure.
While day traders are focused on concepts like trends and ranges, scalpers concern themselves mainly with the bid-ask spread. The volatility of the Forex market, therefore, affects scalpers less than a trend follower or day trader.
Is Scalping for Everyone?
Scalping is most definitely not a suitable trading method for the majority of Forex traders. The profits made from scalping are understandably much lower, and the scalper depends on many small profits as opposed to making it big with one specific position. The scalping technique lowers your risk as a trader, and on the flip side, lowers your potential for great profit. When all of a scalper's small profits are combined, is where they make their money.
Taking human nature and accepted trading psychology into account, the scalper has to be a patient and diligent individual who is willing to forego the desire for instant gratification, and wait patiently while their trading account grows. An excited and impulsive person will achieve nothing by scalping, in fact, their blood pressure and frustration are sure to increase.
Another characteristic that is necessary for successful scalping is a high level of concentration. While some day traders might open a position, go out to eat, then come back and close the position based on the latest market developments, the scalper must be concentrated on their open positions at all times, and have their finger on the trigger, in preparation for their next move. It requires a serious attention span as well as the ability to stay glued to one screen for an extended period of time.
If you are not a full time trader, and do your trading on the side, you must realize that scalping is a time consuming technique that might not be suitable for your schedule. There is always the automatic traders option, but that is a dangerous option, as we have discussed before. A trader that feels that scalping is the right method for them can also consider semi automatic scalping systems.
With such a tool, your scalping would not require you to stay glued to your screen full time, but would still require a high level of attention.
The Importance of Consistency
Forex trading in general, requires consistency on the part of the trader. This is magnified when it comes to scalpers. Trading unpredictable size positions will inevitably lead to a closing of your trading account. The scalping method, after all, is based on the principle that your small profits will overpower your losses. This will not necessarily work if you open large trades, and lose.
Keep the size of your trades consistent, don't get greedy, and you are very likely to benefit from the scalping technique assuming you meet the above requirements.
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