Explaining Scalping and Position Trading
How does scalping compare
with position trading in forex
Scalping as a trading method is a highly active and energetic style of day trading whereby a trader buys and
sells throughout each definitive trading session.
Scalpers in forex are looking to benefit from the smallest of intraday Forex price
movements, their objective is to rely on frequent but relatively small gains in order to build profits. For
example; scalpers may look for a gain of 2-5 pips (Pip - "Price Interest Point"). Take profit limit orders and the constant use of stops,
are employed to manage positions, which are usually held over periods of time from seconds, to minutes.
Due to the prospective gains being extremely small on individual trades, scalpers will often place tens of
trades throughout each trading session, it's therefore essential that scalpers have access to the lowest possible
|The idea behind scalping in forex is to profit from small
gains, over and over again, which sounds good in theory but it's highly speculative and very
risky in practice. (Image by Pixabay.com)
Scalping in forex is very risky
Scalping is considered to be a risky proposition for many reasons, primarily because it requires a high positive
expectancy; registering a high percentage of winning trades. Precision is absolutely crucial with this style of
trading, scalping also requires constant vigilance.
Whilst not wishing to discourage novices from trading through a
scalping method, it's vital that traders recognize what a challenge scalping represents, due to its many different
issues. Even when trading through a straight through processing, electronic configured network method, the
challenges to banking profit remain high. Not only must scalpers constantly obtain the best spreads to trade
effectively, slippage can become an issue and in an incredibly fast moving marketplace, which becomes more
challenging when trading off lower time frames, slight mistakes or minor adjustments, can render an individual
trade completely redundant, shortly after the very second it's placed.
Scalping and pipsing
For example; a scalper sees EUR/USD at 1.1400, and decides to go long aiming for a five pip
profit with a ten pip stop, they pull the trigger but the market has moved by 3 pips and they're filled at the new
price. Now it only requires a 7 pip retrace of price and they'll be closed/stopped out at a loss. Such a minor
movement in price, which has often been referred to as "noise" can take seconds, and before our novice traders
knows, they're closed out and left nursing a loss in seconds.
The example illustrates that precision alone and a well crafted trading plan with tight money management at its
core, is often not enough to prevent losses when attempting to scalp the market. An argument could be put forward
that the example could be reversed; you may experience as many fills in your favour as against you, however, the
unpredictable and often erratic nature of market movements are accentuated the lower down the time frames you
operate from. A fill 3 pips away from your prediction, when you have a 100 pip stop and are aiming for 100 pips, is
only a 3% adjustment. When aiming for 10 pips, it's a 30% margin of adjustment, a huge difference when you're
aiming for relatively small pip gains.
Position trading involves trading over the longer term and generally trading off the
longest time frames/charts, such as the daily, the weekly and even monthly charts. Position trading is often
considered to be a form of medium term investing in currencies. The phrase relates to "taking a position" in the
market place, as opposed to engaging in short term speculation.
Position traders' trades can often last periods from months even through to years. Position traders will use a
combination of technical and fundamental analysis to make trading decisions. Not only will they reference: daily,
weekly and monthly price charts when evaluating the markets and analyze the medium to high impact economic calendar events, they may trade in line with the a long term investment report known
as the "COT report"; the commitment of traders.
This key report which is published each week, lists the net long and short positions key institutional
investors, such as banks and hedge funds have taken in the market place. Any sudden change in sentiment may
correspond with a high impact event. For example; if the USA announce a larger interest rate rise than expected,
then the dollar will become a more attractive investment target as it'll achieve better returns versus its peers if
simply left to gain interest. Therefore institutional invests may increase their "net long" positions in the
In conclusion, scalping in forex is often risky, short-term speculation, whereas position trading is a form of a
serious, medium-term investment in currencies.