Some people imagine that Forex trading can be very glamorous, with brave and prescient trading bringing huge rewards. Sometimes, such as the way George Soros shorted the pound in 1992, reasoning, correctly, that it would be impossible to maintain Sterling in the ERM, these actions can make huge money and lots of headlines.
This brought wide-ranging repercussions (in that case a dramatic shift in economic policy and, arguably, a collapse in economic credibility from which the government never recovered) and public debate about the role of the money markets in shaping how countries are run. But we don’t see this sort of thing very often.
That is not to say that governments cannot pay heed to what the money markets think of their economic policies (as Liz Truss and Kwasi Kwarteng discovered to their career-wrecking cost last year), but most of the time, the Forex markets are trading away, day after day, without such drama.
Just as economic and political events are seldom so dramatic as the ERM withdrawal or the crash-and-burn 49 days of the Truss premiership, so the day-to-day business of Forex trading often involves making the most out of small developments with minor consequences, ones that nudge the value of currencies a little this way or that.
What Is Scalping All About?
Many traders have a whole approach that is based on this reality, known as scalping.
While this might sound like something out of a Cowboys and Indians film, this is not about lopping the top off someone’s head, but making the most of small changes in value by conducting a large volume of trades aimed at making small gains.
These are not done over a long period, as that would not be a good use of your time and by definition, a small change is a small event, one that happens frequently and can be cancelled out swiftly. Instead, these are transactions that are undertaken very quickly, aiming to make small profits in minutes or even seconds.
In many ways, this is the bread and butter of Forex trading. It may not be glamorous or headline-grabbing, it may not produce vast profits or create overnight millionaires, but it is the single largest market in Forex.
Squeeze Out The Pips
So small are the margins that scalping is measured in pips, which may be fractions of a penny or cent, or whatever else the denomination of a particular currency is. A half per cent gain is the kind of thing you will be looking for.
You would not expect to gain more than ten pips or lose more than seven in any trade, which is why your spread needs to be wide for these numbers to translate into significant quantities of money in the real world.
What it is based on is a lot of technical analysis, with a good understanding of what might nudge relative values of currencies in one direction or another. As such, it is a very volatile market because while small changes may not be dramatic, they are frequent. This makes the strategy popular and accessible because there are lots of opportunities every day.
Another advantage is that you can start out on a strategy like this with relatively little capital to start with, it can help traders in some kinds of securities minimise any losses that do occur and it is a very useful way to widen your spread.
The Risks Of Scalping
However, it might be easy to pick up some misapprehensions about scalping. For instance, it may seem a relatively safe means of trading, because it is not aimed at taking a big punt on a major event that may or may not happen, but at responding fast to things that really are going on.
To give a sporting analogy, scalping might be like a cricketer trying to score a hundred by slowly and cautiously accumulating runs, with lots of singles and few big shots, whereas other kinds of trading might be like trying to score fast by hitting lots of sixes but risking giving a catch with extravagant strokes.
However, it isn’t really like that. Because small movements in currency values happen fast, your move needs to be very quick and you might easily fail to close a trade in the nick of time before the situation changes and you move from profit to loss. The leverage involved means your profits could vanish in a trice.
Therefore, Scalping is anything but a sure-fire, steady-as-she-goes activity. it does contain aspects of significant risk and mastery of it is a hard thing to attain.
Being the tortoise rather than the hare (to pinch another sporting analogy) takes discipline and focus. Day after day you need to be on the ball, looking out for each little advantage to make another little trade and add a small profit.
Traders doing this via funded trading accounts may feel a lot of justification in doing so as they see profits totting up. But you do need to be aware that just because the amounts are small does not mean the risk is. It is because the gains are also small that they can be wiped out so soon.
Consequently, you may end up in a situation where a series of errors could lead to a number of small losses, but unless or until you work out how to turn these into gains, you will go on accumulating these deficits. Because you have a wide spread, these will add up.
Risks can be managed using certain tools, such as automated stop-loss and take-profit tools that automatically close trades. However, many scalpers prefer to close trades manually, as sometimes every second counts.
Counting The Pros and Cons
As such, it is clear there are many pros and cons in scalping. It is time-intensive, requires a lot of fast and cool-headed decision making, and you won’t see big gains all at once. It may seem like a lot of hard work for relatively small returns. If you want to make big money fast or you cannot dedicate yourself to Forex trading as a full-time job, scalping is not for you.
The technical analysis aspect is also important to consider. This means using technology to support your work. That can be very useful in reducing the burden on you to make fast judgements and can provide you with more useful information swiftly.
However, this development also means there is an obvious role for automation, so much so that it dominates trades. This being the case, competing may mean you have to obtain advanced technology, both software and hardware, deploying sophisticated algorithms and accessing detailed flows of information, which is hard for new traders to match.
Indeed, if you have ever seen televised footage of the trading floors in the city of London with banks of computers, many of these will be transmitting the very information that traders will be using for their scalping.
Another consideration is your use of brokers. There are some brokers who simply won’t deal in scalping trades because it is not profitable for them. There is nothing worse than going to one to complete a trade and having it rejected, which, given the brief timescales you are playing with means that you could see your profit vanish like snow off the dyke.
Therefore, before you begin trading in this way, make sure you are set up with a broker who works with the scalping market.
When Scalping Is Not Just Marginal Gains
At the start of this article, the point was emphasised that scalping tends to differ markedly from the kind of dramatic, high-risk trades that can make a lot of money out of momentous economic or political events. However, that is not always the case.
The point to recognise is that scalping is designed to take advantage of small but frequent fluctuations in the market, capitalising on the little bumps and troughs, not high mountains and deep valleys.
However, because the market is sometimes more volatile at times of crisis or sudden change, scalping can sometimes offer some bigger gains. This may not be an everyday thing, but it is important to be aware of opportunities and to capitalise on them when the chance comes.
Moreover, you can benefit greatly from more fundamental analysis. It is still important to be aware of major developments in geopolitics such as the wars in Ukraine and Israel-Gaza, the latest economic trends and data, government policy announcements and political change such as new administrations emerging after elections.
While many of these events will lend themselves to other kinds of trades and strategies, they may also provide useful indicators that can feed into your scalping strategy.
For instance, hints that a new government in a particular country might pursue a different economic strategy might be seen to weaken or strengthen a currency, and you can plan ahead for the scalping benefits that may accrue from this at certain moments, such as the day of a Budget.
Scalping is certainly not for everyone and you need to think carefully about the pros and cons of such a strategy. But if you can undertake it successfully, you may find it is a very lucrative means of operating in the Forex markets.