Understanding a Scalping Forex Strategy
A scalping forex strategy entails extremely quick opening and liquidation of trading positions. Most traders who use this strategy can keep positions for as little as a minute, and 3-5 minutes at the most. Traders seek to make small profits of 1-5 pips in each scalp. Scalping enables them to go for multiple trades in short time periods.
Possible Profit Generation Using Scalping
A traditional forex trading strategy may go in for a maximum of 3 trades in a day. Their target would be a profit of 300 pips in total i.e. 100 pips or more in a trade. Scalping, on the other hand, allows the trader to conduct multiple trades in a day. The target would be a profit of maximum 5 pips in a trade. By conducting multiple scalps (about 100 in number) in a day, the potential profit can go up to 500 pips. This potential profit is much more than what could be generated using a traditional trading strategy.
Would Scalping be Beneficial for You?
A scalping forex strategy is not meant for all types of traders. Scalpers forgo large risks for smaller returns which can multiply and eventually give a much bigger profit. Patience is a quality required for scalping, as is diligence. Impulsive traders who want to profit on every small trade may not be suited for scalping, as there are losses in some small trades too. Yet if a trader becomes comfortable with scalping, then he can go ahead and use it as his core strategy.
Best Currency Pairs for Scalping
Scalpers also use certain automated systems, which can save a lot of effort. The best currency pairs for scalping are usually GBP/USD, EUR/USD and USD/CHF. EUR/USD is the most liquid currency pair, and is also the least volatile. This is because they are highly liquid currency pairs. They also react in a more slow and subdued manner to major announcements about economic data. They do not show sharp movements very often. These currency pairs are called majors.
Alternatively, there are also carry pairs which exhibit liquidity, but are also volatile. These include the currency pairs of EUR/JPY and USD/JPY. The yen usually comes under a carry pair. Carry pairs are traded mostly for interest income, therefore it is not such a good idea to scalp these currency pairs.
There are also exotic currencies, which are not suited for scalping. These would include lesser known currencies. They may have unpredictable gaps in price and may be more volatile than majors. Exotic currencies include the currencies of Brazil, Russia etc.
Best Time for Scalping
Quiet periods, where trading patterns are more predictable should be the ideal time for scalping. Additionally, forex traders should scalp during times when there is no expectation of economic data to be released from key markets. This is because economic data can cause great volatility in the forex market.
To conclude, it must be kept in mind that scalping is a specialised activity and requires adequate fundamental and technical setups to reap benefits.