There’s over $5 trillion of currency traded on the market daily so there’s little question why the forex market attracts investors looking for quick, short-term profits. If you’re interested in short-term trading, forex scalping can be a viable strategy. But what exactly is forex scalping, and is it the right strategy for your needs? Let’s take a closer look at some of the pros and cons of this common trading strategy.
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What is Forex Scalping?
Forex scalping involves quickly buying and selling currencies in order to turn a small profit multiple times. Forex scalpers usually don’t hold their positions for more than a couple of hours, and many forex scalpers take their profits as soon as their trades become profitable. The aim of forex scalping is to see these tiny profits add up throughout the day and total a larger, more worthwhile investment.
Unlike longer-term strategies, most forex scalpers don’t rely heavily on fundamental analysis or GDP reports when they choose which currencies to buy and sell. Instead, they often use technical analysis to determine which currencies are likely to change in value on a minute-to-minute basis. Many forex scalpers also rely on automated software offered through their brokerage to execute their trades.
Keep in mind that in order to turn a large enough profit to make their time investment worthwhile, most forex scalpers need to use leverage. Leverage helps you place a trade larger than the amount of money you have in your brokerage account. Leverage can be a crucial asset to compound profits, it can also compound losses as well. You should be very careful not to invest more money than you can afford to lose if you decide to use leverage.
Pros and Cons of Forex Scalping
The forex scalping strategy has both benefits and drawbacks. Let’s take a look at some of the factors you’ll want to consider before you begin.
|Faster profits. If you hate the anticipation of holding a trade for a long period of time, forex scalping might be right for you. Trades close faster, which means you get your profits sooner.|
Easier for newcomers. Have you ever traded stocks? Many of the same technical analysis strategies are used by both day traders and forex scalpers. This can make scalping a more comfortable entry into the forex market for stock market migrants.
|Can be riskier. Unlike longer-term trading strategies, the profits you’ll see when forex scalping will be small. This means that a single bad trade can wipe out the profits from a series of successful trades.|
Requires more leverage. To see significant profits in forex scalping, you’ll need to use more leverage. Using high levels of leverage can quickly wipe out your initial investment if you aren’t careful.
How Can I Scalp Forex?
Do you think that forex scalping might be the right strategy for you? Let’s take a closer look at how you can get started.
Choose a Trading Strategy
The basis of successful forex scalping is a solid trading plan. Sit down with a few of our best articles on forex trading and create a plan. Your plan should include information on:
- The currency pair or pairs you want to trade
- Your broker’s fee schedule and how you’ll overcome it to turn a profit
- The technical indicators you’ll look for to know when it’s time to buy or sell
- The amount of leverage you’ll need and how you’ll avoid major losses using leverage
Once you understand how you’re going to trade, it’s time to open a forex brokerage account.
Choose a Broker
You need a forex broker to begin forex scalping. Not every brokerage firm offers access to the forex market. Before you commit to a broker, take a look at these key characteristics:
- Fee structure: Margins for forex scalpers can be razor-thin. If you choose a broker with high fees, your broker’s commission will begin to seriously cut into your profits — you might even end up losing money.
- Available leverage: High leverage is often crucial for forex scalpers, especially if you begin with a lower dollar balance in your account. Inquire about your broker’s leverage availability before you open an account.
- Scalping status: Some forex brokers have banned scalping on their platforms. Before you open a brokerage account, check to see if your broker of choice has instituted a limit on the number of trades you can execute in a day, hour or month.
Not sure where to begin? Check out our list of the best forex brokers available to U.S. traders.
Fund Your Account and Make a Trade
Once you open your brokerage account, you’ll need to add some funds before you can make your first trade. These funds may take a few days to transfer from your bank account into your brokerage account. Use your broker’s leverage and your trading strategy to determine how much money you’ll need to get started.
Once your account is funded, you can finally make your first trade. You’ll usually want to set your charting software to display a shorter time frame for each candlestick. When your indicator appears, you can place your first buy order. Begin with smaller dollar-balance trades until you fully get the hang of using your broker’s unique platform.
Get Started in Forex
No matter which forex trading strategy you decide to use, successful trading begins with a solid basis of market understanding. Start by reading more about some of our favorite forex brokers or taking a deeper dive into forex charting. There’s no way to deny that knowledge is power in trading — and profits!
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