What is Forex Scalping? The foreign exchange market or foreign exchange trading is becoming more and more popular due to its huge transaction size and volume. Where once only large investment banks and other financial institutions could function in the currency market, almost anyone can now invest in foreign exchange. Like stock or commodity traders, forex investors need some type of strategy when deciding on currency pairs and when to enter and exit positions.
Scalping is one of the many forex investment strategies, and the easiest way to do it is to predict short-term movements in exchange rates. Forex scalpers are like the exact opposite of those who use the buy-and-hold method because they just want to get in and out of positions quickly to make a profit and run. A scalper may only hold a position for a few hours, in extreme cases or just a few minutes. These hit-and-run investors look for market indicators that specifically affect foreign exchange rates.
National and international news events have been shown to affect currency exchange rates. In fact, investors can access real-time pricing changes 24 hours a day in Forex trading. As a result, forex scalpers may only have a few minutes to enter and exit positions before the market corrects itself and incorporates the news into pricing. Scalpers use key indicators to help them predict price fluctuations.
Government statistics tend to be more valuable to forex scalpers for a number of reasons. For one, the U.S. dollar underpins nearly 90% of foreign exchange transactions, so any economic data on this key country could have some impact on the exchange rate, at least temporarily.
Second, U.S. government statistics are considered the most reliable and accurate data available to investors. Also, the real benefit of scalpers is that government data should be a closely guarded secret, meaning that all investors big and small can access the same information at the same time. Because small retail forex traders are able to raise and move money faster than larger institutional investors, they should have an advantage when it comes to taking advantage of short-term movements in exchange rates caused by new information releases.
However, it is important to understand that forex scalpers can only profit if they can actually predict how the market will react to information. For example, if an investor has a position in the USD/EUR currency pair, they may be inclined to believe that if the U.S. GDP growth rate is higher in the fourth quarter, the dollar should rise relative to the euro. However, if the U.S. economy grows slower than expected, even if it is still faster than the euro (and if the euro area grows faster than expected), the dollar may actually fall based on this information. Furthermore, even if investors do realize based on information on which direction the market should move, they still need to enter and exit positions to absorb the information into pricing.
Forex scalping is a very risky investment strategy because the market is very volatile and positions are leveraged to the extreme. In the short term, scalping can cost investors their entire capital, and possibly even their accounts. Although a viable option, we encourage traders new to Forex to look for another, safer strategy to use.