Scalping in the FX Market

Scalping, the practice of very high-frequency trading that attempts to capture small moves in the instrument being traded, is one of the many approaches that may be taken to forex trading. In this type of a strategy, a trader is attempting to capitalize on the short-term volatility in the underlying instrument, usually taking very little overnight or long-term exposure. The issues with applying this approach to forex trading include the fact that forex necessarily involves a high degree of leverage, that currencies tend to have only small daily moves, and that the degree of risk is high for the potential rewards.

Because the daily volatility in currencies has historically been somewhere between one third and one half of the volatility of the major U.S. stock indexes, in order to make any significant profits in currency trading, an investor must take very large positions – this is compounded by the fact that most standardized trading instruments (futures contracts in most cases), are denominated only in large quantities. Furthermore, because of the large denominations, these instruments usually employ a high degree of leverage. Therefore, with the stage set with the above factors, in order for a trader to successfully, or profitably scalp currencies, he or she must take highly leveraged, very large positions that are unlikely to move significantly in the course of a given day. If a large move does occur, the trader has a massive degree of exposure, meaning that a wrong bet means that the entire account could be eliminated if something unexpected occurs.

In the overall spectrum of investment strategies, particularly when limiting the universe to scalping forex strategies, forex trading is better suited to other approaches. While it is certainly possible to make successful and profitable trades using this approach, or to develop a successful investment program that can be profitable over an extended period of time, this is an inherently risky segment of trading that has a below average risk / return profile. Where a global macro approach will take a fundamentally based view of a currency and wait for that view to come to fruition, scalping requires more volatility than is normally present in the global currency markets. There are more profitable and less risky ways to trade currencies than scalping, which itself is better suited to stock index or individual stock trading.