Scalping, the art of getting in and out of trades within a few minutes, is one of the most popular ways to trade the forex markets. However, there is a great deal of debate about whether scalping is profitable for retail traders. So, is scalping profitable for retail traders?
Scalping is extremely profitable for experienced forex traders. Scalpers typically get much better returns than day traders but it’s worth knowing that it is much harder to scalp the market, than to follow the trend. Scalping is only recommended for very experienced traders.
Is Scalping Profitable For Forex Traders?
Scalping is very popular among forex traders because it allows them to trade frequently and take small profits each day. The frequent trading can help traders offset brokerage commissions while the smaller winning trades should, in theory, add up over time.
Scalping is a method of executing short-term trades, usually minutes or even seconds. Scalpers rely on the high liquidity and low spreads on the major currency pairs. For example, a pip in EUR/USD is worth about 10 cents. In addition to those favorable conditions, scalpers love highly volatile markets with lots of momentum as they are very profitable for this trading style.
It is quite difficult to find a broker that allows scalping because of the fast order placement and cancellation. If you choose an ECN forex broker, chances are they will allow some scalping on the account. Some brokers charge extra fees for placing orders within five minutes after the previous one.
Many experienced traders make fortunes by scalping the forex market, but it is not very profitable for unexperienced retail traders because they cannot compete with big institutions that have access to much lower spreads and better technology. Scalpers also need to be very quick in placing orders. To be successful as a scalper, you need to monitor the market very closely and be prepared to enter trades within minutes.
So, the answer is yes, scalping is profitable if you have an edge over other traders in terms of speed, access to information or equipment. Scalpers look at the price level changes every minute and sometimes even faster.
The Benefits Of Primarily Scalping The Forex Markets
There is a reason that scalping forex markets is so popular – because there are a lot of perks!
You’ll Have A High Frequency Of Trading Opportunities
The primary benefit to scalping is the fact that you’ll have a huge amount of trading opportunities to take advantage of. If you enter a scalping trade and it goes against you, there’s no need to panic – as long as the price isn’t moving too quickly. You can simply wait until the price gets back into the range that you were expecting before closing out your position.
Whereas swing traders may only take one trade in a week, scalpers can take multiple trades in a single day, even in a single hour. And, every time the price moves in your favour by your target exit, you make money.
Scalping Trades Are Not Held Overnight Or Over The Weekend
The shorter time frame that you hold a position, the less risk there is. This means that you can take your profits quickly if everything goes as planned. You don’t need to wait for an overnight or weekly close to book your profit – simply cashing out near the local highs or lows will do nicely.
Holding forex trades over the weekend is risky because you don’t know if the price will continue to move in your direction throughout the weekend, whilst you have no access to the markets. Consequently, it’s possible that you could end up taking a loss or not be able to lock in your profits that were sitting on Friday.
You Can Make Trades Regardless Of Market Direction
Day traders and swing traders cannot make money if the higher time frame charts are range bound. However, traders scalping the markets only really need the price to be moving slightly in order for them to make money. Scalper can still take short term positions within an overall downtrend, during a longer term uptrend or even if the market is range bound.
This flexibility allows scalpers to place trades more frequently than swing and position traders because they don’t need to wait for confirmation of a breakout or other trading pattern to take an entry; they can simply pick their entries based on whether the price is moving.
The Negatives Of Scalping Forex Markets
There are a few negatives when it comes to trying to scalp the forex markets. Although there are positives, the negatives can lead to huge downsides so they’re worth baring in mind if you’re looking to take this seriously…
Scalping The Forex Markets Can Lead To Big Drawdowns For Retail Traders
One problem many retail traders run into when scalping the markets is that it can be difficult to find consistent profits in day-to-day trading. Many traders will scalp in and out of the markets several times a day only to see their trades go against them. This can lead to big drawdowns that can wipe out an account very quickly.
The Lower Time Frames Are Harder To Predict
When you’re trading the higher time frames, typically they’re much clearer, easier to understand and you have a lot of time to make a decision. However, with the lower time frames, things can change very quickly and you can miss out on a lot of opportunities or get caught on the wrong side of the market. This is why many traders will have to use a wide variety of indicators just to stay in the market at these times which can lead to situations like going short when going long would be a better choice.
The more frequently a trader takes trades, the more likely they are to get into losing trades. Scalping can work well for many traders, but only if the trader is disciplined enough to follow their trading plan vigilantly.
I would say that scalping profitably is one of the hardest parts of forex trading.
Scalping Requires Being Constantly At The Charts
When swing trading the forex markets, you only need to be at the computer for a few minutes per day. Whereas with scalping, you’re usually constantly at the charts because you need to be looking for new setups every few minutes.
Scalping can lead to ‘Rabbit Hunting’, which is extremely frustrating for traders.
Many forex traders find themselves in a situation where they spend half their day chasing rabbits, losing out on potential gains. For example, when the market is ranging, you may get stopped out of your trade only to watch the market continue in that direction for 10 pips. This is why it’s important to consider not just whether scalping is profitable or not, but whether you can be profitable with scalping.
Scalpers Pay Higher Commissions Than Swing Traders
Every time you enter a forex trade, you’ll pay for the privilege. This will either come in the form of spread, or commission but regardless, your broker will be charging roughly 0.6 pips for you to open a trade.
Swing traders rarely take positions so this is nothing to them, but with scalpers, only taking small amounts of pips, the costs can really mount up and cause losses.
Trading with an ECN broker is a way to make this as cheap as possible.
The Most Profitable Forex Pairs To Scalp
The most profitable forex currency pairs to scalp are pairs with high volume and liquidity like EURUSD, USDJPY, GBPUSD and USDCAD. With scalping it’s very important to use the strongest currency pairs available with tight spreads and low slippage.
Minor pairs like AUDCHF will have much higher spreads than Major pairs like EURUSD, which is a problem for scalping. To successfully scalp, you need to ensure your spreads are as small as possible to ensure the spread isn’t eating into your profits.
Another thing to consider is that scalping with Majors has a more liquid market which will make it easier for you to get in and out of the markets on time. However, some traders prefer trading Minor currency pairs because they are less liquid, giving them more opportunity to scalp at the right times but I wouldn’t recommend this.
While scalping GBPUSD can be relatively easy for forex traders new to scalping, scalping EURUSD or other Majors will require a lot of practice and experience to become profitable. For example, there are many news releases relevant only to the Euro that could cause the price to suddenly move during the London session.
Do Forex Traders Need Large Capital To Trade?
Scalpers don’t require too much capital in order to trade the forex markets successfully. As you’re trading a high amount of trades per day, you wouldn’t want to be risking a large amount of capital in each and every trade. Also, as trades are closing very fast, you wouldn’t need to worry about using margin with open positions that are being held for hours.
A lot of profitable forex scalpers do seek additional capital and funding to further their development and allow them to risk a smaller percentage of total capital per trade. I would recommend looking into the top online forex prop firms to see if you would like to obtain a funded account and trade larger capital.
In Conclusion – Is Scalping Profitable For Forex Traders?
In summary, scalping is a very profitable way to trade the forex markets but only if you are disciplined and follow your trading plan. Many traders get caught up in chasing rabbits instead of sticking to their plan, which causes them to lose money over time.
If you’re new to scalping then I would recommend trading the Majors like EURUSD or USDJPY because they offer more opportunities for scalping and have a much more liquid market. Trading Minor currency pairs is less profitable for scalping, but can be a good change of pace from time to time if you’re willing to take the extra risk.
It’s important that you understand why forex traders choose this method of trading, what the benefits and drawbacks are, what kind of trader you are.
Are you going to try scalping the markets?