How to Profit From Very Small Moves in Forex Trading
Investors can profit when a Forex currency pair makes a very small move. Also known as scalping, traders must be prepared to take on a lot of risk in exchange for a small reward. Forex traders select a currency pair, then watch the charts for an opportunity to open a trade, earn a very small profit and get out before the market conditions change. By doing this repeatedly, Forex traders can make many small pluses add up to one large profit.
Review your Forex account to see if you're trading with the maximum leverage possible. In August 2009, the Commodity Futures Trading Commission (CFTC) reset the maximum leverage amount for U.S. Forex traders to 50:1. Instead of using a 100:1 or 500:1 leverage amount, Forex scalpers now risk more of their account principal to earn the same profit. If your Forex broker offers a smaller leverage than 50:1, open a new account with a broker offering the maximum leverage amount.Step 2
Check to determine if your broker allows scalping. Traders can have their funds frozen or their account closed if their Forex broker doesn't allow scalping. Brokers that do allow scalping may have a mandatory time period the trade must remain open, which could put you at a disadvantage. For example, a forced 5- or 10-minute wait could stop you from closing out a position to take a profit or contain a loss. Ensure that your scalping account has no time restrictions.Step 3
Select a currency pair with high volatility, like the GBP/JPY (British pound sterling/Japanese yen) or USD/JPY (US dollar/Japanese yen). Avoid popular currencies with low volatility, such as the EUR/USD (Euro/US dollar) and the USD/CHF (US dollar/Swiss franc). As a scalper, you need the currency pair to make big moves in a short time. Now decide which time period you want to trade. The time frame starting when the US Forex market closes at 4:00 p.m. EST until the Japanese market opens at 7:00 pm EST is especially volatile. In addition, volume is low since traders are waiting for the Asian session to open before getting back into the market.Step 4
Analyze the chart for your currency pair and the market conditions to find a good trade entry point. Place a buy order if you think the price of the currency pair will rise, or sell if you think the price will fall. Monitor the trade and be ready to close out the position once your profit or loss target is reached. You can also place a stop-loss and limit order to automatically close out the trade once the price hits your predetermined profit or loss levels.
- Forex markets become more volatile right before economic data reports, such as Non-Farm Payroll, are released.
- Scalping Forex adds an additional level of risk. Trade with only those funds you can afford to lose.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.