Forex spreads – Low Spread Scalping Strategies

Forex scalping is a popular form of trading among traders worldwide. Entering and exiting multiple trades within short time frames is what makes scalping a somewhat exhilarating trading method too. However, forex scalping does come with various challenges and is only an effective strategy with a proper understanding of spread. In this article, we’ll dive a little deeper into what scalping is, and the importance of low forex spread. We’ll also look at some key strategies to implement when scalping in the forex market.

What is forex scalping?

Forex scalping is a form of day trading that sees forex traders buying or selling currency pairs over very short time periods. This ranges from seconds to minutes at a time. This is done in an attempt to make quick profits off minor price movements in the market throughout a trading day. Since the trades are usually small, selecting low-spread currency pairs is key. If the spread is too wide, chances are no profit will remain once the trade closes. Because scalping involves small gains (5 to 20 pips per trade), traders may try to maximise profits by increasing position size.

What is the forex trading spread?

In the forex space, the spread is the difference between the buy and sell price of a currency pair. Spread is usually measured in pips, with one pip usually equal to 0.0001 for most currency pairs. This is the smallest unit of the price movement of a currency pair.

Fixed spreads vs variable spreads

Fixed spreads appeal to traders with limited budgets for several reasons. They come with smaller capital requirements, and they stay the same, regardless of market conditions. Fixed spreads also make calculating transaction costs easier. A disadvantage of trading with fixed spreads however is the increased risk of slippage because of more frequent requotes.

Variable spreads on the other hand are in a constant state of flux. This is because the difference between the buy and sell prices of currency pairs changes continuously. The spread widens or narrows depending on market volatility or based on the demand for currencies. While variable spreads do not come with requotes, they may become unprofitable relatively quickly.

Low-spread scalping strategies in Forex

There are different strategies a trader can adopt to approach scalping. Considering the speed at which scalpers execute trades, these strategies seek to reduce the risk of incurring losses. Let’s explore some of these strategies.

Trading major currency pairs

To start, scalpers will typically choose to trade major currency pairs (EUR/USD, GBP/USD, etc) with high liquidity and tighter spreads. This increases the opportunity for maximising profits.

Using an economic calendar

A forex scalper will also make daily use of an economic calendar to keep informed on economic news and geopolitical instabilities. Currency prices (and forex spreads) are significantly impacted by factors like war, political instability, data releases, central bank and interest rate releases, and even environmental disasters. Knowing what’s going on globally will help a trader better react to price movements and get into or out of trades quickly.

Using leverage to open larger position sizes

Forex scalpers will usually use leverage to open larger position sizes and amplify potential profits. How much leverage a trader utilises is largely dependent on their budget or the level of risk they’re willing to incur. Leverage can however pose a large risk. It is highly volatile and while it can be used to maximise gains, it can also magnify losses exponentially. This makes the need for a strategic risk management plan more important to safeguard one’s capital.

Automated trading to increase efficiency

A forex scalper may turn to automated trading to increase the efficiency of their trades. Automated trading involves setting predefined rules (criteria) for when trades should be entered or exited. It entails the use of different types of orders, e.g., stop-loss, take-profit, trailing stops, etc. Automated trading can carry out a large volume of trades in a small amount of time. It also seeks to ensure that feelings of fear, greed or impulsiveness do not negatively influence trading decisions. Scalping is about accumulating small gains after all, so avoiding emotions that push a trader into making rash decisions is crucial.

Keeping a trading journal to monitor performance

A forex scalper may consider keeping keep a trading journal to build up a historical frame of reference. Having older data to look back on will help the trader identify strengths and weaknesses in their trading strategy and adjust where required.

Portfolio diversification

Finally, regardless of how one trades, portfolio diversification is another key strategy for scalpers. It plays an important role in minimising losses by ensuring risk is spread across different instruments. For a scalper, this would mean not investing all their capital into one type of currency pair or trade.

In conclusion, while low-spread scalping offers the potential for increased profitability, the strategy is not without risk. Traders must remain cognisant of the factors that can impact spreads at any given moment and know how to react appropriately. Staying informed of market conditions, properly monitoring their trades and being mindful of risk is crucial to avoid losses. Practice is also key, particularly if you’re new to trading.

Practice scalping on a demo trading account

Opening a demo trading account with a reputable Forex broker is one of the best ways to become a more skilled trader. A demo account provides the perfect simulated trading environment in which to practice trading. Using virtual funds, therefore safeguarding your own money, you can open and close trades and assess outcomes. Mimicking live market conditions, you can implement your scalping mga estratehiya at teknik sa trading.

A demo trading account will also help you become more familiar with the trading platform and establish what trading will look like going forward. You can learn more about teknikal na pagsusuri in order to optimise your trades without putting your own money at risk. Once you’ve built up enough experience, you can then consider moving over to a live trading environment.

Why choose IronFX as your broker?

IronFX is a globally renowned CFD broker that seeks to provide an unrivalled trading experience. This is achieved through a range of trading accounts, a dynamic customer support team, and superior trading conditions. IronFX also gives its traders access to extensive educational resources to help boost their trading expertise, skills, and knowledge. These resources are comprised of stellar podcasts, webinars, blogs, glossaries, trading videos, etc. Traders are provided with a wealth of information, tips, and crucial insights for trading forex. Making use of IronFX educational tools will help you build confidence and skill as you progress on your trading journey.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.