A Fundamental Explanation of Forex Scalping

Generally speaking, scalping refers to a type of transaction that is fast in and fast out, which has long been a mystery to many, while there are also many traders see it as a superior way that is more profitable than day trade. Then what is the secret of scalping? Why are so many trading platforms so secretive about it?

Scalping requires extraordinary skill

Scalping traders hold only for a few seconds or minutes at most. During the busiest hours of the day, their main purpose is to grab as many pips as possible for multiple times. Since scalping traders basically stare at charts all the time, scalping is best suited for those who can spend hours focusing on trading.

Analyzing from trading strategies, scalping transactions often appear on vulnerable trading platforms. Due to different sources of the quotation, server speed, network speed, etc., the quotes among various platforms are not synchronized. Speculators use the platform with faster quotes as reference and operate on the platform with slower quotes. The accuracy rate is extremely high, since they know the short-term trend in advance.

For example, if an investor observes the prices of two platforms at the same time, finding that the prices on platform A change a few seconds faster than that on platform B, then he/she will have the ability to "predict the future". The act of using this delayed quotation to make a profit is included in scalping.

For a no-dealer platform, scalping is an indifferent or even welcomed strategy, because all the orders will be actually traded in the market, which will not only do no harm to the dealer, but also make it easier to earn trading commissions. For the market maker platform, however, due to delayed quotes and gambling transactions, customers using the above two methods of scalping will seriously damage the interests of market makers, thus many market makers will restrict or even ban scalping transactions.

Original scalping has been replaced by ultra- short-term scalping.

With the development of network technology, scalping in the original sense has basically been replaced by ultra- short-term scalping, which emerged in 2009. In fact, network technology has become more and more developed, the original scalping has basically disappeared. Instead, ultra-short-term scalping is based on three theories of limit of foreign exchange (the three must-win theories, the probability of realization of which is almost zero for most of traders because of the existing assumptions).

The three theories of limit are as following:

1. Aiming at earning the smallest pip. Assuming there is no spread and only one stop-profit pip, then in most cases we can always earn this pip.

2. With sufficient money to ensure it will not blow up, you can wait until your position is profitable.

3. Powerful enough to manipulate the market, such as a federal reserve or a central bank, which is able to have a huge influence on the market.

Of course, in order to ensure their own interests, current platforms will control the number of orders that are closed within 5 minutes, and even the total number of orders within a few hours, to prevent their profits from being stolen by traders. Anyway, the ultimate goal is to prevent the emergence of the first limit.

As a result, the ultra-short-term scalping transaction came into being, which strictly controls profit and stop loss and is easier to be achieved. This is what many so-called automatic trading software do: operating with small profits when there is no market, making a few pips at a time with the stop loss no more than 30 pips, and the simulation run of which can often reach a high win rate! As a matter of fact, many manual operations do the same, but return rates are different.

To sum up, the key pip of scalping in short-term is to move fast without hesitation. Generally, there will be a fluctuation of 10-20 pips, sometimes 50 pips when it is larges. Once reaching the profit target, you should be out immediately and do not waver. For example, if you earn 10 pips, then just quit without thinking anything else. In addition, you had better not hold the order for more than 10 minutes. Close the position immediately if the trend has not walked in the direction you expected after more than 5 minutes.

What kind of traders are suitable for scalping?

To be a scalping trader, the following characteristics are called for:

enjoy the thrill of fast trading; don't mind focusing on icons for hours; have no patience to wait for a long deal; be quick and sharp to change your prejudices and directions; flexible fingers; be careful and skilled as a surgeon.

Finally, please be aware that this type of trading is in no way suitable for newbies or investors who are not tenacious enough.

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