Basics of Scalping Strategy in Online Forex Trading Platform
Scalping is a day trading strategy in the Forex trading platform online that involves benefiting from short-term movement in the currency prices. Forex traders who utilize scalping strategy do not intend to use it for the long term. Forex scalping strategy involves investments that last for a few hours or even a few minutes. Scalpers pay special attention to market indicators to determine the optimum time to enter and exit currency pairs in the Forex trading platform online.
The goal of the scalper is to beat the spread and gain from the trade. Spread, as you may know, is the difference between the bid and ask price. Scalpers are generally safe traders whose main intention is to maximize their profit from the short-term change in currency prices. Most scalpers maintain their position for around 3 to 6 minutes while some stay for as little as one minute. None of them, however, stay in the market for long and quickly close the trade.
How Scalping Strategy Works?
Before we go into the nitty gritty of scalping strategy in forex, let us look at a simple example to get an overall idea of the strategy. The example below provides a summary of how the forex scalping system works in the Forex trading platform online.
Suppose a scalper is trading in XAU/USD currency pair and He or she expects that the head of Federal Reserve Bank of US will make an announcement stating that the US GDP shrank in the previous quarter. The news will result in increase in XAU/USD currency pair as investors will flock to gold to hedge their savings from imminent economic downturn.
The scalper will jump in right at the time the news becomes public, say at 1300.056, stay for a few minutes and quickly close the trade after three to six minutes when the currency turns according to the prediction of the scalper.
How Traders Gain From Forex Scalping Strategy
As said above, scalpers look to take advantage of quick movement in the currency’s bid ask spread. In normal trading the bid ask spread tends to remain in balance overtime due to steady flow of demand and supply. Everyone has same information therefore the trading is consistent allowing Forex trading platform online brokers to earn a stable profit.
However, sometimes the bid ask spread becomes narrower or wider than usual due to short-term imbalances in demand and supply. Scalpers know about this short term imbalances in price spreads and base their online forex trading strategy to benefit from the currency.
More specifically, the scalpers will devise the following forex scalping strategy to gain from short term movement in bid ask spreads.
- If the bid ask price spread is narrower than usual,the ask price is lower than the bid price. This occurs when the sellers outnumber the buyers and the broker wants more buyers to bridge the gap. The broker will therefore set ask price lower than bid price to attract more buyers to the currency pair. Scalpers try to capitalize on the moment with the expectation that the spread will normalize within a few minutes.
- If the bid price spread is wider than usual, the ask price is higher than the bid price. This occurs when the buyers outnumber the sellers and the broker wants more sellers to bridge the gap. The broker will therefore set ask price higher than bid price to attract more sellers to the currency pair. Scalpers try to capitalize on the moment with the expectation that the spread will normalize within a few minutes.
Some traders say that forex scalping strategies are similar to grabbing nickels in front of a bulldozer. A slight delay and they could end up losing from the trade. The scalper has to work quickly form different small trades. He may buy at 1300.0560 and sell at 1300.575. Then, he will again buy at 1300.0530 and sell at1300.0560. In order to be successful he or she will have to make sure that the price movement is not driven by real information rather than it is momentary and will normalize once the real information becomes common to the public.