The Ultimate Guide to
Scalping In Forex Trading
Scalping refers to a method of forex trading where the trader opens and closes positions within a few minutes or seconds of each other, with the sole purpose of making small profits which can then be accumulated over time to result in more significant earnings.
By quickly opening and liquidating positions in a time frame that does not usually exceed five minutes, traders hope to make small amounts of profit without subjecting their accounts to the market uncertainties which can hit trades that are left open for much longer.
Scalpers prefer to take the small profits that are available to them on open trades rather than leave trades open for a long time and subject such trades to market uncertainties. Of course, there is still potential for scalping to lead to losses.
How to Choose a Broker For Scalping
It’s important to remember that not all brokers allow scalping on their platforms. Typically scalping is only allowed on accounts that are operated on ECN platforms. Not only is the ECN trading condition generally better for scalpers in terms of execution speeds and in terms of having a no-slippage environment, it can also be better for ECN brokers as the greater number of trades taken by scalpers will lead to more commissions being earned from both trade entries and trade exits.
On that note, here are five things to consider when choosing a broker for scalping:
1. What is the broker’s policy concerning scalping?
Usually, brokers will indicate in their Terms and Conditions document whether scalping is allowed on their platforms or not.
2. Where is your broker located?
There are jurisdictions where the regulators of the forex industry have rules that specifically prohibit scalping. Therefore, you need to know if the broker you intend to use is located in such a jurisdiction.
3. Is it an ECN Broker?
As stated earlier, scalping is usually acceptable on ECN accounts because a commission is charged for trade entries and exits in addition to spreads. Furthermore, ECN brokers do not act as counterparties, so they have nothing to lose from traders making repeated small profits or losses from scalping. In contrast, market makers do not charge commissions on trades and act as counterparties to trades, so they stand to lose if traders keep making consistent profits from scalping. Many market makers do not allow scalping on their platforms.
4. Does the broker have fast price feeds?
In scalping, the speed of entry and exit is essential in setting up a trade. Your intended broker must be able to provide fast price feeds, so you are sure you are getting prices which are up to date. Speed matters and delayed price feeds are detrimental for scalpers.
5. What does your broker specifically say about scalping?
Where you have doubts as to what the terms and conditions of your broker say about scalping, you can settle these doubts by contacting the broker directly via email or live chat. A reputable broker should be able to provide a definitive statement on whether you are allowed to scalp or not.
Why Scalpers Should always Read the T&Cs
When it comes to scalping, traders should pay particular attention to their broker’s terms and conditions (T&Cs) to know what is allowed and what is not. This will help prevent problems down the road. Some main things traders should look out for include:
- Whether the T&Cs make any mention of scalping and the time frame which serves as the cut-off limit for a scalp and a regular day trade.
- Check to see if the broker states in plain language whether or not scalping is allowed on the platform.
- If the broker’s terms and conditions specifically allow price arbitrage trading or not. If this is not allowed, it is a sign that scalping is not allowed as well. (where traders who have access to multiple price feeds may take advantage of the differential in price to enter and exit trades very quickly)
Where there are doubts about whether scalping is allowed or not, contacting the broker directly before opening an account would be advisable.
