This is the first in a series of posts on the different techniques for making money with forex. Today I'm going to introduce you to Forex Scalping.
Forex Scalping is a technique of trading where positions are opened and closed very quickly and usually not help for very long at all. A position can be opened and closed in less than a minute.
This forex trading strategy is often seen as less risky than more fundamental methods. But is it really less risky and can anyone do it? Well read on to find out if this method is for you…
How Forex Scalping Makes Money
So the basic idea is making small amounts of money across a lot of trades. Each trader has their own specific strategy. For example, a trader may look for periods of great movement in the market. This periods can create gaps in the spread.
The trader will be looking for signals in order to open trades that take advantage of volatility. The trades opened will often be very small. This is the whole idea behind scalping and helps guard against the volatility.
Step by Step…
Here is a basic example of how a Forex scalper will work. Keep in mind this is a very basic overview which I've put together to illustrate the concept rather than be an actual trading strategy:
Find the Direction
You'll want to find which way the pair is trending. You'd do this by drawing trend lines on a weekly or daily chart. These lines will represent your support and resistance levels.
So if the trend line is moving down, you'd sell at the resistance line or if the direction is moving up, buy at the support line.
Trades are closed when you've made around 10 pips or less. The trader will obviously need to account for the spread as well.
Often the most important part of scalping is knowing when the market is turning and it's time to close out and step back. If the charts don't support your strategy, you need to pull back and wait until the time is right.
Is Scalping for you
Scalping requires a lot of time and patience. This is not a strategy where you can open a single trade each day, and then knock off. A scalper needs to focus for long periods of time.
Forex scalping works best when there is volatility. A scalper needs to be calm and trade without any emotion. They also need to have strong self control so as they don't over leverage or open positions that are too large. They need to be prepared to make a few pips here and there on each trade.
Scalping also requires knowledge of technical analysis. This isn't a strategy for beginners. Although I believe it is less risky than some other strategies, it only works with technical analysis skills.
Although I believe that any “forex robot” is essentially a scam, traders will often use software to assist in executing their strategy. Scalping can require a lot of speed and this is where automated trading, being assisted by an actual trader can be very effective. This type of software is often custom built by the trader and is for advanced traders only.
Stay away from any software that says it can automate trading. These “bots” are usually very basic and can in no way generate income in the long term, beyond simply being lucky. If you're looking for something that is automated, you'd be much better off trying copytrading.
The Cons of Scalping
A single trade can wipe out all your profits for the day.
During periods of extreme volatility, stop loss orders will sometimes fail due to the speed of movement in the market. Even the top brokers can't prevent this all the time. And human error creeps in as well. The more trades you make, the more likely you will eventually make a mistake.
It can take a lot of time
It requires a lot of time sitting in front of a screen, analysing technical indicators to be a successful forex scalper.
Brokers don't like it
Because of the speed of trades, brokers can often be overwhelmed if their software isn't up to the task. However I believe that these days this is negligible issue. The broker will also make more money due to the spread on trades. So I think that this is simply a myth.
Choosing a Broker
It's up to the trader to choose a broker that meets their needs. A good place to start is with a regulated broker that has been around for a while and has a good reputation. A quick google search of a broker will throw up any stories about that broker having issues with executions.
Getting Started with a Practice Account
Never practice your strategy with a real account. Once you've learned how to plot trend lines and read charts, the best place to begin is by putting your strategy to the test with a practice trading account.
Ever heard of the saying about 10,000 hours of practice until you master a skill? Well that applies to forex too. You'll need to practice and practice until it almost feels boring.