This article looks at the features of scalping, as well as comparing the scalping and market making forex trading strategies.
Scalping is one of the most popular forex trading strategies that fall under the day trading umbrella. It sees a foreign exchange trader opening and closing multiple trades in a single day with the intention of incurring small profits. While this may seem nonsensical to some, those small profits when added together can be highly beneficial. This is highly risky as well as a string of bad trades can lead to extremely damaging losses. Unique features to the scalping forex strategy are that the trades are opened and closed in a matter of minutes, and no trades are held open overnight.
Why use the scalping forex strategy?
Forex scalpers generally attempt to scalp between five and ten pips per trade; a behaviour which is then repeated constantly throughout the day. By using high levels of leverage and executing trades with a few pips profit can be beneficial if completed (and repeated) across a particular time period daily. Remember, that one standard lot presents with one pip value being $10; therefore, for every five pips the trader can make $50. If you trade ten of these per day, and are successful, your daily earnings will be $500.
Market making and scalping forex trading strategies
Scalping is similar to market making. When a market maker purchases a position he immediately seeks to offset the position and capture the spread. Scalpers place and order and immediately seek to make a profit.
Just as the similarity must be understood, so must the difference. A market maker earns on the spread, whereas the scalper will pay a broker on the spread. Therefore, when a scalping trader purchases on the ask and sells on the bid price, he is required to wait for the market to move in order to cover the spread he has paid. The market maker will purchase on the ask and sell on the bid, therefore immediately gaining one or two pips as profit from making the market.
While both forex trading strategies are risky, the market maker is at less risk than the scalping trader. The scalper, like the market maker, will trade positions quickly but still has the spread to pay. This means that the more the scalper trades the more the market maker will earn off the pips from the spread. Therefore, irrespective of the amount of trades a market maker will execute, the chances are greater that he will be profitable.
Benefits and drawbacks of being a scalper
As can be deduced, the scalping forex trading strategy is a high-paced one requiring quick judgements from the trader. If you are a forex trader who enjoys this impulsive, stressful environment with a need for discipline and focus then you will do well with scalping. In fact, it may be the most effective of the forex trading strategies in accordance with your personality. It is important to be comfortable with your strategy, and having a quick strategy to meet an impulsive personality is beneficial.
However, if you prefer to analyse a trade and consider each decision carefully before acting then scalping is not for you. It is a high-risk strategy and those who have low risk tolerance would not cope with this type of forex trading strategy. This is why scalping is recommended for experienced traders exclusively.
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