Learn Forex: What Is Scalping in Day Trading?
Many Forex day traders refer to themselves as "scalpers." But what exactly is scalping in the Forex market? Here's a quick look. You might be familiar with the term scalper. Ticket scalpers, for example, purchase tickets at face value, and then turn around and quickly sell them for slightly more to turn a fast profit. In foreign currency trading, the idea is similar.
Forex scalpers make many quick, short-term trades throughout the day with the goal of capturing a few pips in profit off of each trade. Typically, Forex scalpers stay in positions for very short timeframes, as little as a minute and no longer than five. The key to profiting is volume. Using this trading style, scalpers open dozens or more positions each day, because they're just scalping a few pips off of each trade. The more trades: The more pips they capture.
Scalping in Forex: Pros
If profits are limited to a few pips on each trade, why do traders choose this style of day trading? What are the benefits of scalping? For starters, successful scalping can help a trader accumulate profits and compound an account faster. The key though is winning a majority of daily trades and using leverage appropriately. A high win-rate coupled with aggressive leverage can add up fairly quickly.
Plus, scalping greatly limits the trader's risk exposure. Forex trading can be extremely risky, as large market fluctuations are unpredictable. Therefore, staying in positions longer opens a trader up to an increased level of risk. With scalping, trades are opened and closed quickly, and thus, scalpers can limit their exposure to large market swings. Additionally, the majority of scalpers do not leave positions open overnight, so there's no overnight risk involved. But although risk is limited, these short-term trades do create some disadvantages.
Scalping in Forex: Cons
As scalpers open and close trades on short timeframes, the opportunity to take advantage of large swings and capture larger profits is greatly limited. Unlike trend traders who try to make large profits off a single position, the scalper can typically suffer from the "missing out" effect, because they miss those big swings that can be widely profitable if they would have stayed in the trade longer.
Additionally, scalping is time consuming. It requires the trader to have razor-sharp focus on their open positions, always be ready to open and close trades, and be tracking price movements constantly. In effect, scalpers are married to the charts during trading hours, and must open and close trades over and over again throughout the day. Longer-term traders can open a position, and walk away until they're ready to close the position.
Finally, scalpers must always watch the spread between the bid/ask prices. Because scalpers may make 5-10 pips in profit off of a trade, larger spreads can quickly wipe out those profits. Therefore, spreads are much more of a concern for scalpers, compared to longer term traders.
For some, Forex scalping is the strategy that they prefer. It limits risk and the trader wins more trades. But it does offer some disadvantages. Traders should consider the pros and cons of Forex scalping before committing to this high-frequency style of day-trading.