Scalping As a Forex Trading Strategy
Trading on the Foreign Exchange market, or Forex, has become increasingly popular due in no small part to its sheer size and volume of trading. There was a time when only the large investment banks and other “institutional” vehicles of finance could play in the currencies market but now it is possible for just about anyone to invest in the Forex. Just as with equities or commodities traders, investors in the Forex need some type of strategy when deciding on currency pairs and when to enter and exit a position.
Scalping is one of many Forex investment strategies and at its simplest involves anticipating short-term movements in the exchange rates. Forex scalpers are like the polar opposites of those who use the buy-and-hold approach because they are only looking to enter and exit a position quickly—make their profit and run. Scalpers may only hold a position for a few hours—and in the extreme cases—or mere minutes. These “hit and run” investors look for market indicators specifically known to affect rates on the Forex.
National and international news events have been shown to affect currency exchange rates. In truth, the Forex trades 24 hours a day with investors all having access to real time pricing changes. Thus, a Forex scalper may only have a few minutes to enter and exit a position before the market corrects itself and factors the news into the pricing. Scalpers use key indicators to help them anticipate the price fluctuation, such as:
· GDP – Gross Domestic Product
· Trade balance
· Interest rate announcements
· Consumer/business confidence surveys
· Retail Sales
Government statistics tend to be more valuable to Forex scalpers for a couple of reasons. First, the U.S. dollar backs nearly 90% of all transactions on the Forex so any economic data released about this key nation will likely have some affect upon the exchange rates—at least temporarily.
Secondly, U.S. government statistics are considered to be some of the most reliable and accurate data that investors can get their hands on. Plus, the real benefit to scalpers is that government data are supposed to be well-guarded secrets meaning that all investors—big or small—are made aware of the same information at the same time. Because small retail Forex traders are able to raise and move capital faster than larger institutional investors, they should have the advantage when it comes to taking advantage of short-term movements in exchange rates caused by the release of new information.
However, it is important to understand that a Forex scalper only profits if they can actually anticipate how the market will react to the information. For instance, if an investor had a position in the USD/EUR currency pair, they might be tempted to believe that the dollar should rise relative to the Euro if the U.S. had a higher rate of GDP growth in the 4th quarter. However, the dollar might actually fall based on this information if the U.S. economy grew at a slower rate than predicted—even if this rate was still higher than the Euro growth (and if the Euro zone grew faster than predicted). Plus, even if the investor does realize which way the market should move based on the information, they still need to enter and exit the position before the information can be assimilated into the pricing.
Forex scalping is a very dangerous investment strategy because the market is so very volatile and positions are leveraged to the hilt. In short order, scalping can cost an investor all of their capital—and perhaps even leave their account in the red. Although a viable option, traders new to the Forex are encouraged to find another, safer strategy to use.