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Scalping is basically nicking short-term profits from small price movements. However, there are many different types of scalping and not really a definitive definition.
An example of scalping in the Forex market would be:
A trader places a buy order when the EURUSD is at 1.1294, they also place a sell order at 1.1295. If they are spread betting on forex and the stake size is £100 per point they stand to make a quick £100 if the sell order is filled on short-term volatility.
Scalpers make profits on FX by doing this several or hundreds of times a day. It’s a pretty high-risk form of trading and requires a serious amount of leverage and risk. If a position moves against you it can start to create a large loss in a short amount of time relative to the potential profits from the limit order.
Why do some Forex brokers ban scalping?
This depends firstly on what type of Forex broker you use. There are two types of brokers:
- Forex brokers that hedge your positions
- And brokers that don’t
Just because a broker doesn’t hedge client positions all the time doesn’t necessarily mean they are evil. After all, whether or not you make money trading forex has nothing to do with how the broker manages their risk. It’s down to how well a trader calls the market.
If a broker hedges all client potions instantly then there should be no issue. Most Forex brokers that do this offer straight-through trading on MetaTrader 4. MT4 spread betting brokers tend to give clean prices and charge a commission. There is generally no conflict of interest and in these instances the brokers want the clients to make money.
Some brokers through don’t hedge all client positions. This isn’t because they are basically a bookie and want traders to lose all their money as they take the other side. The more reputable forex brokers only don’t hedge when it is not cost effective to do so.
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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.