Things to consider before you start scalping forex
Before adopting a forex scalping strategy, it’s important to understand currency liquidity and volatility, and the pros and cons of this trading style.
Liquidity in forex scalping
Around $6.6 trillion worth of forex transactions take place every day, which makes it the most liquid market in the world. Liquidity refers to the ability to buy and sell quickly without affecting a market’s price. High liquidity makes forex a good market for scalpers, who need to enter and exit their positions quickly – sometimes within seconds.
The liquidity of a currency isn’t fixed; it’ll change based on a number of factors, including the time of day, the number of traders that are active in the market at any given moment and wider economic conditions like the countries’ inflation rates (GDP). The most liquid forex pairs tend to be those most traded, such as EUR/USD, GBP/USD and USD/JPY.
In highly liquid markets like forex, the bid-offer spread tightens, making the transaction costs affordable despite the large volume of positions scalpers open. Because gains are incremental, smaller spreads allow for greater profits.
In other markets, liquidity often means stability, but forex is highly volatile. This means major short-term price movements can happen at any time, which can cause the value of currencies to spike up and down in seconds. This volatility presents opportunities for greater profits – another reason why scalpers often favour forex. But conversely, this can also lead to an increased exposure to risk.
Volatility in forex scalping
Volatility is favourable when trading derivatives, as it allows traders to profit from rising and falling market prices. But it’s important to have a risk management strategy to minimise losses, especially when using leverage to open a position. Because scalping is most successful when markets are volatile, the best time to open a position is during the session’s open and close.
When you’re learning how to scalp forex, it’s important to bear in mind the following pros and cons of this trading style: