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A Breakdown on Scalping In FX Trading

Discussion in 'Forex Discussions' started by painofhell, Nov 5, 2015.

  1. painofhell

    painofhell Content Contributor

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    So you want to be a scalper and cash in on forex trading the easy way?

    As much as I do not wish to be the bearer of bad news, I am here to tell you that there is no free lunch in forex trading.

    So what is scalping anyway?

    A scalp is a very short term forex trade, usually with high leverage, aiming for a few pips. It has its own place in the trading environment, but only with some experience. It is easy to make some money scalping in the short term, but tough to keep it up consistently.

    One or two significant losses usually wipe out the dozens of small wins.

    The Name Sake

    Scalping derives its name for traders with an eye for the spread. The spread is the difference between the bid and the ask. For many traders, the spread is the price of admissions, but for scalpers the spread is the entropy.

    In short, they are looking often for small retracement trades and looking to earn back their cost for trading plus the spread. Historically, they have been unpopular with brokers who try to manage their own book and they were said to have been scalping profits from the marketmakers or others on the exchange.

    How to profit from scalping

    There are some times when scalping is appropriate and profitable.

    In ranging markets
    Divergence Trades
    Support or Resistance Breaks
    Scalping in a ranging market

    Ranging markets are a good scalping environment because the action of the market will be reasonably predictable. To scalp in a ranging market, you would want to wait until the currency pair hits the end of the range and starts it™s return to the other end.

    Set your stop outside of the range by at least 50 pips and set your target.

    Scalping with Divergence Trades

    Professional daytraders often make divergence trades that are scalping trades by nature. This is a trade that you would enter based on the price being overextended in one direction. The divergence trade can be a difficult one because if you enter your contrarian trade too soon, you could end up having to ride out a rather sharp drawdown, or have your stop hit.

    Scalping on Support or Resistance Breaks

    Typically when a support or resistance break happens in the market, the initial move is fast and strong. This is perfect for scalping because you can be in and out of the market quickly.

    If you insist on incorporating scalping into your strategy, make sure to have a fail safe stop set to protect yourself. Use moderate leverage rather than extreme, and try to choose your trades carefully. Scalping can be fun and profitable, but it can also quickly lead to ruin when done carelessly.
     
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