Scalping is a style of forex trading that involves opening and closing positions in a matter of minutes in order to make quick gains from a currency pair movement. While many experts disagree with this method of trading, it has its place especially when trading fundamentally, or trading the news.
Technical trading on its own is insufficient in developing a comprehensive forex trading plan. The forex market has many key institutional players such as high net-worth individuals (George Soros, Warren Buffett, etc), central banks, hedge funds that control multi-billion dollars, investment banks, and multi-national companies. When these players are in the market, they do not care if a chart pattern has formed. Their decisions on where to put their money are fashioned by economic news and political developments. These two factors form the basis of market sentiment that produces the longer term direction of a currency.
However, when an economic news item is released and the numbers differ enough from the consensus figures to change market sentiment, we will a short-term spike in the direction that the news numbers point to. While there is usually a profit-taking induced retracement and subsequent long term movement in the new direction, it is the short term spike that occurs in minutes that is the focus of our scalps. Macro-Economic News That Move the Market.
The key news items that drive the markets to include:
Retail sales reports
Interest rate decisions
These data are planned well in advance and arranged into a new calendar which traders can start to follow well ahead of the release date. News releases are transparent; there are no insider secrets such as operates in the stock markets. Again unlike in the stock markets where orders may be delayed if there is the insufficient volume to cater for investor demand, the forex market has no such problems because of the market depth and liquidity (the forex market has a $4trillion daily turnover). So it is possible for traders to react quickly and scalp pips off the initial spike following news releases. How to Scalp Without Getting Your Fingers Burnt
If news scalping were that easy, then every trader would be rich. The practicality of it is that timing has to be spot on. News releases to retail trader platforms are delayed and it is usually the big dogs who get the news a few minutes early from premium services such as Bloomberg and Reuters that can react faster.
So how can a retail trader scalp out news trades?
The key is to use the smaller time frame charts; 15 minutes, 5 minutes charts. Once the news has triggered fundamentally, the key is to enter technically. Wait to assess the market direction that the news has produced. This usually occurs in a matter of seconds. Following this will be a retracement as those who got in right at the news release (usually the institutional traders who flood the market with millions and billions of dollars worth of orders). On the smaller time frame charts such as the 5-minute charts, look out for the appearance of a technical candle indicating that the retracement is over and that it is time to get in. You can then enter in the new direction at the open of the next candle and see whether you can get out 30 to 50 pips, depending on how strong the numbers are.