Many people have questions relating to scaling in Forex. Is it a reliable strategy, are there risks involved, what traders typically use it, and is it legal? Along with such, you may wonder which brokers are best for scalpers and the advantages/disadvantages of the process.
The first thing to answer is whether or not it is legal. The question can’t easily be answered because there are multiple types of scalping.
Scalping refers to a Forex trading strategy that helps you get small profits by using high leverage and high trading volumes in shorter time frames. The investors who use the approach are usually called Scalpers.
Many traders have taken to using this strategy, especially when it comes to data releases, such as central bank policy decisions and non-farm payrolls. If you were to buy 0.10 of the EURUSD with an exchange level of 1.15 and you chose to wait until the price hit 1.16 (50 pips), you’d have earned a $50 profit. However, that’s the more traditional way of Forex trading. Scalpers would prefer to purchase one lot of EURUSD, wait for it to raise five pips (from 1.1550 to 1.1555) and make their $50 profit.
When you choose a broker, it is essential that you focus on factors such as maximum leverage ratios, regulations, spreads, and execution time speeds. Because you’re opening high trade volumes, you need more leverage. Along with such, the spreads should be very low because scalpers usually want to see a 5-10 pip profit. If you have a high spread, you could wait for up to 20 pips before you can close the trade, which isn’t considered scalping.
Primarily, scalping is a significantly risky strategy because you trade higher volumes before you see profits. You can usually close the transaction with a small profit, but if you’re only holding one and it loses too much position, you’re left with no gain. To perform scalping well, it is essential that you focus on market volatility and technical/fundamental analysis to help you avoid significant losses.
Most scalpers think it’s always best to perform short-term trades and more profitable than long-term trades, essentially because sitting in one position too long without making a profit can cause you to lose money. With scalping, you’re catching smaller, 5-pip prices with just one lot in the transaction to make five times the profit.
If you desire to try scalping, it is recommended to focus on significant currency pairs, such as GBPUSD, USDJPY, or EURUSD because the volatility is usually higher with US and Europe trading sessions. Also, you should focus on picking the right chart time-frame, such as one- or five-minute charts to see how smaller prices move.
You can also automate the scalping strategy. When you sit in front of your laptop/computer and open and close transactions yourself, it’s called manual trading. However, with an automated system, you use software, called a trading robot, which opens the trades by itself depending on the strategy you’ve selected. Forex robots and expert advisors can also remove any psychological elements during the trading process, but it also ignores the fundamental factors, which is why automated strategies are faster but riskier.
This technique works well if you’re just learning how to scalp, though you will need to take a few hours to understand the method. Therefore, if you don’t have the time or don’t want to learn, it’s best to stick with other scalping methods. You’re going to make multiple trade operations in the day, so you need a broker who offers low commission fees and tight spreads.
There are advantages and disadvantages to using this option. Primarily, the technique is less risky than others, and you can still earn money through various markets. However, you do require a larger fund, have to be good at math, and have quick reflexes.
The question isn’t easy to answer because there are a few scalping types that aren’t legal. For example, arbitrage doesn’t allow you to earn money. If your broker realizes that you made a profit with arbitrage, they aren’t likely to pay you the money you earned. Many times, these profits are made with small price differences between brokers. The price difference is a technical problem; therefore, most brokers don’t believe it is fair to misuse the technical issue to make money.
Another illegal scalping type includes churning. This method requires you to bring a customer to the brokerage company that pays you for doing so. When your acquaintance enters thousands in trade each minute, you get commissions from it. If your friend loses everything, your commission could be higher than the losses, and you make a profit.
Other than these two methods, scalping is considered legal.
Now that you know what forms of Forex scalping are legal and understand the basics, it’s essential that you consider a few things before starting your journey of becoming a scalper.
Primarily, you need to know and understand the spreads of what you’re scalping, along with the appropriate trading instruments. You may also want to follow economic and analysis developments to keep up with the times and be updated. Along with such, it’s essential that you learn about the technical indicators and analysis styles that are suitable for scalping to ensure that you learn how to make profits and avoid losses over time.