Forex Scalping is a mechanism in the forex market used by investors and traders to purchase or sell a currency pair. In case of a purchase, the trader would then hold the purchase for a period in an attempt to make a profit. Therefore, for one to make a sale on the currency pair, it implies he or she is expected to make a desirable profit margin. Forex Scalping is not used for massive profit gains but involves the raking in of small profits. The small profits are incurred regularly by repeating the buy or sell and hold strategy for several times in a trading day.
The Concept behind Forex Scalping
Two major aspects constitute the aspect of forex scalping. These include the currency pair and the Percentage in point which is usually referred to as the ‘pip’.
1. The Currency Pair
The currency pair is regarded as a commodity of trade which is defined as a quotation between two different currencies; the value of one currency is usually quoted against the other currency. The first listed currency in the pair is referred to as the base currency and the second currency is referred to as the quote currency.
The base currency can also be called the transaction currency and it is applied as the domestic or accounting currency to represent all profits and losses incurred. It can also be defined by the aspect of how much of the quote currency is required to get a unit of the base currency.
The quote currency is also commonly referred to as the counter currency and is used in determining the value of the base currency. It is important to note the quote currency is the second currency in both the direct quote and indirect quote.
The major difference between the direct quote and the quote currency is that the direct quote involves the quote currency is the foreign currency while the indirect quote involves the quote currency being the domestic currency.
2. The Percentage in Point
Also referred to as PIP, Percentage in Point is the smallest price unit move that an exchange rate can make based on particular market criteria. Numerous currency pairs are usually valued to four-digit decimals thus the smallest change, in this case, is the last digit decimal; this relates to one percent commonly referred to as one basis point.
A pip can also be considered as the basic aspect of the forex market. Using pips can the trader ascertain whether a profit has been made or a loss incurred. Concerning a currency pair, a trader purchasing a particular pair such as the Euro and US Dollar pair will profit if the Euro in that particular case increases its value relative to the US Dollar.
The Forex Scalping Process
The basic procedure involves both the traders and investors make use of leverage allowing for a larger stake on the currency pair; therefore a small change in price can catapult to a large profit margin.
Strategies Involved in Forex Scalping
Two key strategies are used in forex scalping. They include:
- The Manual System of Operation.
- The Automated Trading System.
1. The Manual System
This strategy involves the use of market indicators and forex charts to signal the trader in interpreting the trend and thus make a just decision on the best method to be used to incur the most profit generated by ND10x created by Nicola Delic or Forex Monarch created by Karl Dittmann.
The decision entails whether to buy the currency pair or sell and buy later at a lower price. The manual strategy relies solely on the expertise and understanding of the trader, therefore, the more experienced the trader is the more profit one can make in the forex trade.
2. The Automated Trading System
This strategy involves making use of the trading software to ascertain at what point a purchase or sale should be made on the currency pair based on specific parameters that have been given.
Other phrases that can be used to describe this strategy is a mechanical trading system, automated trading, algorithmic training or system trading. It permits the establishment of specific criteria and rules for the trade entries and exits; once these guidelines have been entered the program can be executed and finally make trades based on the given rules.
The rules and guidelines set can be geared towards various conditions such as moving average crossover which is a point in the trading chart where the security and indicator intersect. Another condition could be a complex criterion that requires a professional understanding of a computer program language that is specific to the trader’s market platform. The last condition involves the expertise of a qualified analysist.
Forex Scalping Techniques
There are various techniques used in forex trade but all these can be categorized into 3 groups namely:
- The Trend Trading Technique
- The Countertrend Trading Technique
- The Range Trading Technique
1. Trend Trading
This technique involves making attempts in capturing gains through the analysis of the trend taken by an asset. The concept of a trend involves the movement of a price in one general direction whether up or down.
The traders usually enter into a long position on the price in case it is trending upwards but enters a short position when the price is trending downwards.
The assumption considered in this case entails security will continue to trend in the same direction.
2. Countertrend Trading
This technique takes the assumption that a trading pattern will eventually reverse and therefore makes an attempt to incur profit from that reversal; a term called pullback.
The concept is generally a median strategy in which a particular position can be held for numerous weeks or days.
It can be used for various uses such as incurring pure profit, management of risks and diversification.
3. Range Technique
This strategy identifies areas of support and resistance after which the investor is advised to purchase near the support and sell near the resistance.
Support and resistance areas are concepts used to refer to the price levels on charts that act as barriers; they thus prevent the price of a security from being pushed in a particular direction.
Forex Scalping involves buying and selling of currencies with a typical holding time including multiple trades taken each day. The risk is usually kept small to capture any price change for profit.
The main advantages of Forex Scalping are:
- They offer more trading opportunities
- They tend to deliver a higher winning rate
- They offer quick results
- There are regular entry and exit setups
- There is a limited amount of exposure to market risk.
Risks such as leverage, fees, and spreads ought to be controlled and accounted for in Forex Trading.