Scalping – An Effective Foreign Exchange Trading Technique
When entering the foreign exchange trading market new traders will be faced with the task of finding a trading strategy. For many the option of scalping is particularly appealing as it is a short term technique allowing for minimal trading time and consequentially less stress. However, scalping is not as simple as one may believe. Instead, scalping involves a great deal of risks which remove it from being one of the best foreign exchange trading methods.
What is this scalping foreign exchange trading strategy?
Before considering scalping one should understand what scalping actually is. Scalping is a trading style that allows traders to conduct trades across a short time frame using high amounts of leverage. While the long term trade may seem more financially viable, this short term option makes for small amounts of pip per trade and it is this pip which is worth a great deal.
It should be recognised that scalping is a highly effective means to earn money fast making it inadvisable as a long term trading method. The reasoning behind this is that the amount of leverage used is highly risky and a couple of negative trades can deplete an individual’s trading account.
Can I make a profit off scalping?
Scalping is often viewed as a risky form of trading; however there are instances when it is viewed as one of the better foreign exchange trading techniques. There are three situations when you should consider using the scalping method.
Scalping within a ranged market
The first situation in which the trader can make a profit from scalping is in a ranged market. The reasoning behind this is that the forex market will be more predictable during these times making the risk level lower. When scalping in a ranged market setting you will be required to wait for the currency pairing to hit the end of the range. Once this occurs you must trade while the currency returns to the other side of the range.
Scalping during resistance and support breaks
When a currency pairing moves on the forex market it breaks in fast and strong. This movement is the most effective for a scalper as you will have the opportunity to enter and exit the market while making the pips you want. It is important to note that this trend will continue in the direction you are trading.
Foreign exchange trading scalping with divergence tasks
A divergence trade is a form of scalping trade which all day traders engage in every so often. It is more common among the experienced traders as they do include a great deal of risk. When a trader completes these types of trades they enter into the trade based on an overextended currency price in a single direction. It is important to note that the trade must be entered into at the correct time otherwise one be ‘riding a drawdown’ and can incur a damaging loss. This drawdown could hit your stop loss which will close the trade before any profits are made.