| What is Forex Scalping? |
 Forex scalping is a trading strategy of high frequency, short term trades in the foreign exchange currency market. The highly leveraged and volatile nature of the Forex market is conducive to this short term strategy. There are many sub-systems within Forex scalping, ranging from technical analysis to fundamental trading of data releases. The common denominator is that positions are bought and sold (or vice versa) within short time frames. Just like any other trading or investing system, scalping has its merits and drawbacks.One inherent advantage to Forex scalping is that the trader's risk profile is minimized. Frequent opening and closing of positions locks in profit for successful trades, and minimizes downside for losing trades. Successful Forex trading requires strict risk management (especially for traders with less capital). By scalping, risk becomes more easily managed and palatable for the trader. This is especially true during major news releases, as the scalper can elect to stay flat “until the dust settles.” A major drawback of Forex scalping is increased cost basis. For example, Trader A purchases one Lot of EUR/USD at 1.302-1.304 (almost industry standard two pip spread for the pair) in anticipation of a major move up. A two pip spread times one lot ($10,000 USD) means the trader is negative $20 as soon as the order is filled. Let's say that Trader A is correct about the move higher, and closes the trade two days later at 1.322-1.324. Trader A is up gross 200 pips, minus the two pip spread for a net gain of 198 pips, or $1980.00. Trader B sees the same aforementioned move up in EUR/USD as Trader A, and also enters the market long one Lot at 1.302-1.304. Trader B, however, is a scalper, and he/she does not like to hold winning positions for more than 25 pips at a time. Therefore, during the same 200 pip move up, Trader B opens and closes his/her position eight times. This means that Trader B had to cover a two pip spread eight times for a total of negative 16 pips. Trader B's net profit is only 184 pips, or $1840.00. In this model, Trader A has the advantage over Trader B as far as net profit is concerned. There is a clear tradeoff between risk management and maximum profit. The Forex scalper has the advantage of instant reward, and increased flexibility during periods of volatile price swings. However, the scalper also “donates” more commission in terms of bid/ask spread to his/her broker. Where the trader places the fulcrum on the risk/reward see-saw can only be determined by that individual's risk appetite. Forex scalping is just one way to mediate that up and down ride. |
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