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Forex Scalping

By: EconomyWatch Date: 28 July 2009

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Forex scalping is a form of forex trading that uses high leverage and many short term trades to gradually increase an account’s profits. Forex scalpingthrives on the high volatility of the forex market. Usually, a forex scalping trader completes the entire transaction in few seconds or rarely in minutes. The purpose of forex scalping is to make quick profit by completing many transactions in a day so that the many small gains compound to a bigger profit.

How Does Forex Scalping work?

Forex scalping traders utilize leverage to the maximum as in its absence, the marginal gains in currency movements will not compound to a huge profit. With leverage, even marginal gains multiply to bigger profits.

Their modus operandi is to buy and sell quickly. For example, if they buy a lot of EUR/USD currency pair and after few seconds, see a growth of just 2 pips, these traders, immediately, sell it for a profit of $20.

It is crucial for forex scalpers to have a broker that executes instantaneous orders otherwise delayed commands can decrease or completely wash away the margins.

Advantages of Forex Scalping

The advantages are:

· It lets you make quick profits without much delay. Longer trading styles depend a lot on market trends. Many times, waiting for better opportunities tends to back fire. Forex scalping traders sell lots immediately at the slightest increase or decrease.

· Even the shortest of favorable opportunities with big pip changes result in big profits.

Disadvantages of Forex Scalping

The disadvantages are:

The risk to reward ratio is very low. One bad trade can wash away the entire day’s profit or can even eat away the initial investment.
It breeds speculation and gambling tendencies.
It requires a strict adherence to both time and money management strategies. Individuals falter a lot on these two areas because of greed and adventurous instincts.

Many market maker brokers, who take the other side of the transactions with traders, incur losses whenever scalping traders make profits. So, they have started delayed command executions and this way, scalping is negated.

However, few online platforms do execute instantaneous commands and have automation in place for scalping. Forex scalping thus exists with a high scope of profits and remains a preferred form of forex trading for many.