What is scalping?
Scalping refers to a method of forex trading in which a trader opens and then closes their positions rapidly - usually within a few minutes (or even seconds). Scalpers aren't looking for huge one-time payouts; instead, the goal is to stack up small profits over time by getting in and getting out of trades quickly, multiple times throughout the day.
Scalping doesn't always imply arbitrage (read more about arbitrage in our guide to high-frequency trading), or that a trader is trying to take advantage of pricing latency between two brokers. Instead, it's best to think of scalping as existing somewhere between day-trading and high-frequency trading.
An important aspect of scalping philosophy is the idea that the fast-moving nature of most scalping strategies may allow traders to avoid the market uncertainties which can hit trades that are left open for longer periods of time. Of course, this doesn't mean that scalping is foolproof, or less risky. Scalpers still incur losses (just like any trading strategy).
Evolution of forex scalping: In the late 90s and early 2000s, the price differences for assets that existed across different brokers were more pronounced. To take advantage of these pricing discrepancies, traders would manually arbitrage the off-market price by simultaneously buying and selling the mismatched rates to make a profit.
This method is known as latency arbitrage, and it's achieved by quickly opening and then liquidating positions within a small window of time (usually less than one minute).
However, arbitrage opportunities have become practically non-existent in modern times, unless you are running an automated strategy (such as an HFT-driven strategy) to capture latency arbitrage (and even that practice may be prohibited - more on that below).
Today, scalping has evolved beyond arbitrage. For example, traders may engage in a strategy called "price action trading," in which a trade is established when prices deviate from the median (or middle) of a price range, with the expectation that it will return to a baseline. Like latency-based strategies, price action trading can take place even on time scales small enough to be measured on one-minute charts - or even with tick data (one tick = one price update).
Not permissible everywhere: Some brokers may prohibit strategies that aim to exploit tiny pricing changes, depending on the sophistication of the strategy. It also would depend on the difficulty a broker may have in managing risk - or the risk taken by other market-makers for routing your order while executing those trades.
How to choose a forex broker for scalping
If you've decided to pursue a scalping strategy, your first step will be to pick a forex broker. Crucially, you'll want to select a broker that is well-regulated and highly trusted. A good forex broker will also provide a wealth of resources to aid in your scalping success - market research, forex education, and advanced analytical tools such as charts and watchlists - in addition to a comprehensive offering of tradeable products.
Our team tests dozens of the biggest names in foreign exchange, and - using a proprietary formula that takes into account a range of factors, including trust - we rank the best brokers for forex trading. Learn more about our Trust Score at our Sister site ForexBrokers.com.)
It's important to remember that not all brokers allow scalping on their platforms (we'll dive into this subject further down). If you are looking to begin scalping, we found the following forex brokers to be the best options:
How to get started with a scalping strategy
There are two crucial factors at play when starting out on your journey as a scalping strategist. First, you'll have to figure out if your broker's trading costs are low enough for the strategy to be profitable. Second, you have to determine whether your broker's trading policy permits scalping (regardless of the execution type).
Your broker's trading costs will depend on the execution principle applied to your trading account. For agency-execution accounts, the broker will charge a commission for entering and exiting trades (in addition to spreads), whereas accounts with market-maker execution usually just charge for the spread. We'll explore this in more detail a bit further down.
Determining whether your broker actually permits scalping strategies is a bit more complicated.
We've broken down the four most important questions to ask about your broker, to see if it will allow you to move forward with a scalping strategy:
1. What is the broker's policy concerning scalping?
Usually, brokers will indicate in their terms and conditions if they allow scalping on their platforms. Brokers should disclose how they define both scalping and arbitrage. They should also state their policies regarding latency-driven trading, as well as strategies that involve trading on off-market prices (i.e., exploiting the lag that exists between your computer and the broker's server).
An evergreen piece of advice: Always read the fine print (especially, in this case, as it pertains to execution policy).
If you are still in doubt, don't be afraid to contact your broker directly; a reputable broker should be able to provide a definitive statement as to whether they permit scalping (and how they define it).
Remember: Scalping can mean different things to different people. To some, scalping refers to arbitrage, whereas for others it can represent hyper-fast intra-day trading.
2. Where is the broker located?
A broker in a top-tier jurisdiction likely operates under a strict obligation to provide you with good-quality execution. Off-shore brokers, on the other hand, operate in a lax regulatory environment in which there are no consequences for poor execution or substandard practices. In other words, brokers in top-tier jurisdictions are more likely to follow best practices for order execution, such as adhering to the Global FX Code.
There are jurisdictions where the regulators of the forex industry (or in some cases, the brokers themselves) may have rules that specifically prohibit the practice of scalping. For example, EBS, a major inter-dealer broker used by major banks and brokers in the forex market, prohibits any type of scalping that is driven by latency arbitrage.
There are other Anti-Latency Arbitrage (ALA) mechanisms in place at certain venues, where all orders pass through what's known as a "Speed Bump" (or, latency floor) to slow them down. It's worth noting that these rules usually apply to ultra-high-frequency traders that use proprietary microwave networks or low-earth-orbit satellites to gain a speed advantage.
All of this is to say that you need to know if the broker you intend to use is subject to such rules and if they are well-regulated and highly trusted. If you'd like to learn more about the major regulators and whether to trust your forex broker, feel free to head on over to our sister site, ForexBrokers.com.
3. What account types does the forex broker offer?
Agency execution: Typically, scalping is only permitted on accounts that operate on the principle of agency execution, such as with Electronic Communications Network (ECN) platforms. This is because the broker charges a commission for entering and exiting trades (in addition to spreads) while the order is matched or sent to a third-party market maker for execution.
This means that in an agency execution account, the broker is earning the commission, while the spread is earned by the market-maker executing your trade. Therefore, brokers that offer agency execution may permit scalping just because it doesn't cost them anything if you are making repeated small profits (or losses).
With agency execution, however, the trading conditions (such as the execution quality) may simply not be favorable for a scalping strategy. Some ECNs don't disclose available liquidity, or there may simply not be enough available liquidity to make scalping feasible.
Market maker: On the other hand, market makers are counter-parties to your trades, so they have a responsibility to manage risk. As a result, some market makers simply don't allow scalping on their platforms.
It is possible that some market makers will permit scalping, even though they may stand to lose money if you are making consistent profits from a scalping strategy. It all depends on how they manage their client order flow, and the related risk.
Pro tip: Choosing a broker that handles large trading volumes in agency-execution account types can be an added benefit for scalping strategies (when scalping is permitted).
4. Does the broker have fast price feeds?
When using a scalping strategy, the speed at which you can enter and exit trades is crucial to your success. Your broker must be able to provide lightning-fast price feeds so that you can be confident you are getting up-to-date pricing information for your trades.
Speed matters and delayed price feeds are a scalper's nightmare. Some brokers filter the prices they get from their liquidity providers (LPs), or they may limit their price updates so that traders have enough time to act on a price before it changes. Depending on the degree of such price filtering - and on your scalping strategy - the resulting rate may update too fast, or not fast enough.
FAQs
How does scalping work in forex?
There are many types of intra-day trading strategies that can be considered scalping, but whether any of them are latency-driven or pure arbitrage is a different story.
There can be a fine line between trading on latency, and conducting, for example, statistical arbitrage through the use of highly correlated assets.
At any rate, scalpers in the forex market enter and exit large positions very quickly, and trades can last from a few seconds to a minute or more, while attempting to make a few pips.
Is scalping forex profitable?
Yes, but it is harder to scalp the forex markets today than it was 20 years ago. Over time, forex markets have become more efficient and feature tighter spreads, as well as prices that update more quickly across the world.
Whether scalping is profitable for you will depend on your chosen trading strategy (such as how trading entries and exits are identified). It's important to note that scalping is a somewhat loose term that describes a broad set of potential strategies, with the common factor being speed (fast intra-day trading).
Is scalping a good strategy in forex?
When analyzing financial markets on smaller time scales such as those represented on one-minute candlestick charts or tick charts - they can seem full of noise and seemingly random price action.
It can be difficult to draw actionable meaning from such granular data. Usually, traders only identify useful trends after combining that granular data with analysis of larger time scales (such as hourly or daily charts).
To be successful at identifying the fleeting trading opportunities afforded by scalping strategies, timing is crucial. And for those traders who have put in the work and done the research necessary for developing a forex trading strategy for scalping, the next step will be determining whether the strategy is scalable or sustainable.
Which is the best forex broker for scalping?
The best broker for scalping in 2023 is IC Markets. Whether you are manually trading or running an algorithm, IC Markets' liberal execution policy allows you to trade between the spread and to enter or exit as often as you like across multiple account types and platform options.
IC Markets claims a rapid execution speed of 40 milliseconds from the time it receives your order. That said, IC Markets' terms and conditions declare that it reserves the right to refuse to accept an order that is attempting to scalp, in the context of pure arbitrage. This kind of policy is quite common across brokers.
Tickmill is a close contender for the best broker for scalping, thanks to the low-commission rates on its PRO and VIP accounts. Tickmill also features agency execution and it claims to permit scalping - though (as detailed in its terms and conditions) it reserves the right to cancel any trade if the price has been delayed due to a latency issue.
BrokerNotes.co 2023 Overall Rankings
To recap, here are our top forex brokers for 2023, sorted by Overall ranking.
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Joey Shadeck is the Content Strategist and Research Analyst for BrokerNotes.co and ForexBrokers.com. He holds dual degrees in Finance and Marketing from Oakland University, and has been an active trader and investor for close to ten years. An industry veteran, Joey obtains and verifies data, conducts research, and analyzes and validates our content.
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