Forex scalping is a forex strategy where a trader holds his positions for a very short time, with the aim to quickly make small profits. This can be a very luctrative way of Forex trading.
The time a position remains open varies from a few seconds up to a maximum of 2 minutes. Above that, we usually don’t consider it scalping anymore but normal intra-day trading. The target profit per trade is usually between 1 and 5 pips net – so minus the spread. In theory it is also possible to set up a forex scalping strategy where the target profit is between 5 and 15 pips net, but in that case the position will have to be kept open for more than 1 or 2 minutes in most cases.
Forex scalping, by definition, involves the use of high leverage, because it is the only way to try to make money with this strategy. When working with minilots – where 1 pip is $ 1 – it is little profitable to develop a strategy for which the average profit per trade is 0.5 pips (or $ 0.5). This is different with the standard lots which are 10 times as large (one standard lot represents $ 100,000 in currency) where 1 pip is $ 10. A profit of half a pip per minute can be very rewarding in that case. (Suppose you open and close 60 standard lot trades in one hour, and you have a forex scalping strategy where you win an average of 0.5 pip per trade, then you will make 60 x $ 5 = $ 300)
One of the biggest mistakes novice traders make is to immediately try to maximize profits by using the maximum leverage in such a way that any form of risk management is ignored. (And when forex scalping is applied in the wrong way, that is exactly what is happening).
Another reason why this Forex Strategy is not intended for novice traders, is because it is a strategy which requires an enormous amount of discipline and stress resistance. A single trade can indeed easily wipe out the accumulated gains of an entire trading day, and a trader who completely loses his focus for a few minutes can easily erase the profits of an entire month.
You can set stop losses to protect yourself somewhat, but working with automatic take profits is often not a good idea, because you cannot take advantage of unexpected “spikes” – where the price suddenly moves a lot. A profit of 2 pips can then quickly become a profit of 20 pips. Experienced forex scalpers either use an automated system or a quick, cold-blooded finger.
How does forex scalping work in practice?
The trader must first devise a working system. The most important part of any forex scalping strategy is certainly risk management. The difference between a profitable and losing strategy is in risking only a small part of the total capital and quickly taking profit. After all, anyone who has some experience with online currency trading knows that not being able to handle profits is as great a risk as not being able to accept losses.
Successful forex scalping means risking only 1% to 2% of your total capital and never more, not even occasionally. If you work with very small profit margins, there is no room for greater loss.
The scalper is developing a solid, detailed strategy which he does not deviate from. This is why an increasing amount of automated systems (forex bots) are used for forex scalping because automatic forex trading effectively ignores human psychology (and hence the inevitable vulnerability thereof).
Does this mean that there are forex bots which make you rich while sleeping? No, because you will first have to learn the automated trading system what parameters it should consider. Therefore, you will have to know exactly what you are doing in order to create a profitable forex scalping strategy. (We do not recommend to buy forex software that promises you to get rich without you having to do anything yourself).
Why many brokers are not happy with forex scalpers
Many forex brokers have a dealing desk which takes positions on the other side of the trader. Because scalping is going so fast, the forex broker often doesn’t have the time to handle the position, causing it to lose money easier.
The forex brokers that do not have this problem are those without their own dealing desk, who immediately place their orders with the banks themselves. These are usually brokers where you need to deposit at least a few thousand dollars if you want to create an account.
Forex Scalping the holy grail of profitable trading?
No single strategy is the holy grail of profitable trading. The sooner you realize that, the sooner you can start developing a profitable Forex strategy. Before you build a trading strategy based on scalping, you should first familiarize yourself with money management, risk management, and trading discipline.
For an experienced trader who is willing to put a lot of time and effort into developing a well thought forex scalping system, scalping can be a very profitable forex strategy. For forex beginners, however, it is often a “killer” …