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Investing in stocks on the foreign exchange market doesn’t necessarily mean playing the long game. You can also make a considerable profit from short-term trades, and scalping is by far the most popular method to do so. Here is everything that you need to know about this approach if you’re a beginner in the field.
About Forex Scalping
According to Mtrading, scalping is by far the fastest way to make money on the forex market. This particular strategy turns in a profit by following relatively minor price changes among currencies. This happens shortly after the trade has been entered, and the total timeframe is usually a short one.
Scalping trades occur in M1, M5 or M15, which means that they can last anywhere from one to fifteen minutes. Anything more extensive than that is seldom pursued, and it generally veers into different territory once the fifteen-minute mark is exceeded. During a single day on the trading floor, multiple such movements need to be seized for considerable gains to occur.
Thus, scalpers reap small wins from each trade and later add them all together in order to assess their success levels for the day, week, or month. While some use it as a full-time strategy, others employ it secondarily to augment their total profits from long-term investments in the FX market.
The essential aspect to keep in mind when you’re a beginner in the field of scalping is that you need a successful exit strategy. While plenty of entry points arise during any given day, choosing when to get out of a trade is crucial because it differentiates the winners from the losers. True forex entrepreneurs know this.
When you are playing with small gains that add on top of each other, there’s nothing quite like a huge loss to wipe them all out. Therefore, you need to avoid this at all costs by making sustainable predictions and using technical analysis. A low spread broker is also recommended for novice scalpers.
How to Approach It
Back in the day, plenty of investors engaged in scalping by making use of imbalances in supply and demand. However, identifying such key points is impossible in today’s electronic market. Because real-time data tends to lag and trigger inaccuracies, scalpers have a hard time identifying the perfect moments to enter and exit their trade.
Fortunately, technical analysis and indicators can be used for this purpose. What is more, there are quite a few ways to go about it. In fact, Investopedia identifies three main types of scalping present on the market nowadays. The first one is known as “market making”, and it consists of a scalper simultaneously posting a bid and an offer for a stock.
He or she will then capitalize upon this attempt provided that said stock is a largely immobile one with big volume and small changes. This is the hardest and most unfeasible approach because it involves a direct competition with market makers. Furthermore, when losses happen, they are quite considerable.
The second approach mentioned by Investopedia is a more traditional one which focuses on moving stocks with rapidly changing prices. It consists of purchasing shares in bulk, then selling them as soon as the smallest fluctuation occurs. Traders which choose this route have a lot of liquidity on their hands which allows them to move around as much as 10,000 shares at a time.
Last, but certainly not least, the third and final approach is the closest one to classic trading. The investor enters as soon as they are given any type of positive signal, then exits as soon as 1:1 risk ratio develops. Regardless of which of the three you prefer, keep in mind that you need to engage in hundreds of such processes per day to see any visible profits coming your way.
Because trading forex is becoming increasingly popular, more and more people are having a go at scalping and other related strategies. Thus, if you want to stand out from the crowd, you need to tailor your tactic according to your personality. Keep your eye on the screen, and always think quick. This is the only way to succeed.
Conclusion
Not everyone is cut out for scalping. Although it might seem simple enough because it all happens so quick, you need a lot of discipline to succeed. Decision making is essential, as is knowing when to exit so that you make some gains, or at least cut your losses. Still, with the right approach, visible profits show up in no time at all.