Forex trading takes advantage of the differences in the currency pairs to generate returns. However, there are certain traders who tend to make smaller trades on currency pairs based on the small price movements that occur throughout the trading day. Often they use indicators and technical analysis to look for profitable opportunities. Let’s learn more about forex scalping and who should use it as their trading strategy.
Meaning Of Forex Scalping:
As we know, forex trading is a type of trading done on the exchange rates of numerous currency pairs. Let’s assume a currency pair involving the US dollar and Euro. For this particular currency pair, the exchange rate can vary throughout the day based on various circumstances. Hence, when the price of the currency pair changes, scalpers act quickly and buy and sell based on these smaller price movements. Often scalpers seek for smaller returns on a myriad of transactions throughout the day. One significant difference between regular traders and scalpers is that while traders look for larger returns and are in the market for a longer time, scalpers just swoop into the asset, make a trade and move on.
How Does Forex Scalping Work?
Scalpers closely monitor the price movements of their selected currency pairs and open positions for buy or sell accordingly. When the particular criteria for buying are met, they purchase the security and sell it when the price reaches another pre-defined point. This method tends to create smaller gains because traders only focus on small price movements. However, it’s worth mentioning that small losses can also occur. Also, some traders might experience large gains or losses. Overall, one can say that a forex scalping strategy creates multiple transactions, and every one of them creates a smaller return.
When you trade on these smaller price movements, the process is known as position trading. It means that when you position trade, you are doing nothing but putting a number of traders on currency pairs and end up with an average price. However, you need to find a currency pair, decide whether to go long or short and determine the position’s size in order to create a position.
Requirements For Forex Scalping:
Here are some basic requirements you must fulfil in order to take advantage of forex scalping:
- Technical Analysis:
It is important for forex traders to learn how technical analysis works. Typically, the technical analysis consists of charts, patterns as well as other indicators for analyzing and predicting the price movements of an asset.
Candlestick patterns are a type of chart that takes into consideration the general price trends of the assets. Additionally, it indicates the opening and closing prices of the investment visually. These are called candlesticks because of how they appear.
- Chart Patterns:
Chart patterns indicate the prices for multiple days visually. These patterns are named after the appearance they take, like the cup and handle.
- Trading Stops:
Although it can be tempting to make larger trades and earn quick money, but taking this road will only be destructive for you. Trading stops let the broker know that you are only willing to lose a certain amount of money on a particular trade. When you use a trading stop, you are keeping the trade from occurring in case the loss is going to be beyond the acceptable limit. Thus, trading stops act as a method to prevent larger losses from happening. They set a stop at the maximum amount you can afford to lose on a trade. The limit, once fixed, cannot be changed to prevent traders from the temptation to make larger trades.
- Emotional Control:
For a scalper, it is important to keep their emotions in control and their heads cool because the prices fall and rise rapidly. They should always stick to their trading plan and not fall prey to greed in order to minimize the risk of losing their entire capital.
The Bottom Line:
Forex scalping is a great strategy for traders who don’t want to lose large amounts of money and want to play safely in the forex market. Scalpers can keep their trades small and give themselves some space when they feel they have made a mistake and want to get out of the trade as soon as possible.