October 10, 2013

The Relation Between Scalping and FX Rates

FX Rates

Some of the alternatives to forex day trading might even be better when it comes to profiting from fluctuating FX rates. Take for example scalping as a trading method. When compared to day trading, scalping ends up being the less risky proposition.

However, if you do choose scalping as a process then you have to be very careful about what their relationship with FX rates is like and how this relationship impacts other variables like your choice of forex brokers.

What Is Scalping?

Scalping is a trading method where you profit from small movements in FX rates. The actual process of scalping involves the study of forex charts based on small time frames ranging from one minute to a few minutes and then placing trades on the basis of the signals you get.

Scalping would typically see you place multiple trades in a single day and gain minor profits from all of them. Such can be the number of trades that your monthly net profits can be larger than what you can gain through other forms of trading such as day trading or even position trading.

The Benefits of Scalping

The biggest benefit of scalping is that you will be minimising risks to your positions and account capital from the fluctuating nature of FX rates. This minimisation of risk occurs because of the fact that scalpers never leave their positions open for too long. In fact, scalpers’ trades only remain open for a few pips at a time and are closed as soon as the traders’ positions meet their predefined criteria.

Choosing the Right Broker for Scalping

The relationship between scalping and FX rates is such that most forex brokers are against this mode of trading. The reason why the majority of forex traders are against scalping is that they are market makers. Market makers typically take up positions against their forex traders.

As a scalper only leaves his position open for a small period of time, these market makers are unable to take up positions against them. This is why traders who are interested in scalping should look for those forex brokers who allow scalping as per their terms and conditions.

Scalpers Favour ECN Brokers

ECN brokers are basically non dealing forex brokers that stream FX rates and their movements straight from the market to the trader. Furthermore, their traders’ trades are placed directly in the market and the ECN brokers only play the role of middlemen as opposed to taking up positions against their traders.

As scalpers always look for a few pips’ worth of movement in FX rates, they need the spreads to be as tight as possible. ECN brokers provide variable spreads which can go even lower than a single pip if they offer fractional spreads.

Therefore, for scalpers it is important to realise the relationship between FX rates and their forex brokers. Realising this would allow these traders to not only choose those forex brokers that are non-dealing but also choose those forex brokers who do actually make it easier for them to make profits.



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