The forex scalping strategy has something of an aura of mystery surrounding it. Some believe that it is the worst nightmare of brokers who have to suffer losses as their clients make good profits. Others think that it’s the safest way of trading the market, due to the small size or short lifespan of different trades. But how true is this belief that scalping involves minimal risk? And do brokers really dislike scalpers that much? We’ll take a look at this issue in this article.
The main principle of a successful trading strategy is cutting losses short, and letting profits run. In other words, your profits should be sizable, while your losses are small. We evaluate any trading strategy on the basis of its adherence to this basic rule even before checking the actual trading results generated by it. So the question that we’ll ask is, does scalping really adhere to this basic principle?
In scalping you do not let your profits run for the most part, because each trade is supposed to last for only a limited time. Regardless of the direction taken by the price action, the scalper will rarely let his profits run because the strategy dictates that a scalper realize any gains or losses as early as possible. On the other hand, while the same is also valid for losses, traders are not always in control of the market action, and the software may not always perform has expected. So although there is a stop-loss order in place, if the price gaps (common in short term trading, and in the time periods preferred by scalpers), or if the software fails to execute the order of the trader in a timely way, the result may be that the realized losses are much greater than intended. In consequence, the scalper will sooner or later encounter a situation where his losses run, while his profits are cut short.
The other point is about the profitability of scalpers, and how brokers fear and hate that. We have already seen that in principle the scalpers have little reason to boast much about a great deal of profitability. And indeed, most brokers have their policies stating that they are totally fine with this kind of trading. The firms that refuse to accommodate brokers are mostly those that do not possess effective, up-to-date technologies in trade execution. These firms suffer from latency issues that make scalping a dangerous style for them, regardless of the ultimate profitability of the scalper himself.
In short, the principles of money management are generally accepted by most traders, and as such, any strategy that claims to be successful has to abide by them. It is clear that in most cases the scalping strategy fails to follow the rules. Although scalping is popular with those who just begin to learn forex, due to the reasons that we just discussed scalping is not good for beginners in general. Still, if you do want to use this strategy, make sure that you are relaxed and at ease when trading. Scalping is even more stressful than ordinary trading styles, and you don’t want to practice it when you’re already under the pressure of other emotional issues.