Scalping and News Trading in Forex

The fast-paced in-and-out style of scalping and news trading is probably closest to what the average person imagines when they think of trading. Both are a type of day trading strategy. 

Both scalping and news trading are among the riskiest forms of trading out there, offering quick profits at the risk of quick losses. It means people have to look for higher returns to mitigate the risk. The higher potential returns tend to attract the attention of beginner traders.

Because of the fast-paced nature, traders need their wits about them with a professional trading mindset to do scalping or trade news events. If after reading the information below, you decide that these high-speed trading strategies are for you, you will need to employ all the tips and tricks we have discussed to control your trading psychology.

Contents: Scalping & news trading

• What is scalping?
• What is news trading?
• How are scalping and news trading linked?
• What is the best timeframe for scalping?
• Manual or automatic? Which is better and why?
• Risk vs Opportunity

What is scalping?

Scalping is when you take a very short-term position in an attempt to earn a small number of pips quickly. Hence the notion of “scalping”; i.e. taking a little off of the top. The market is constantly moving, and scalpers are looking to ride those small ups and downs to get a little bit of profit each time. Typically, scalpers are technical traders, trying to make a small profit on many trades before the news even has a chance to impact the price.

What is news trading?

Trading the news is pretty self-explanatory: it’s when you wait for a news event that would affect an asset and trade as fast as you can ride the move that results from the news. This strategy combines fundamental analysis and aspects of technical analysis to determine exit points and risk management.

A classic example is trading a company earnings report. Day traders will wait for a company to report their earnings, read the headlines on whether the earnings are good or bad, and then jump into the stock to try to grab some profit as soon as possible after the earnings are released.

Source: Babypips.com

A more typical example for forex traders is trading off the reaction when the Federal Reserve announces an interest rates decision or trading the monthly Non-Farm Payrolls US unemployment data.

A word of caution: Such well-telegraphed events might already be priced in by the time the news is released i.e. the markets would move before the data release in anticipation of either a positive or negative impact. This is what is behind the phrase ‘Buy the rumour, sell the news’. 

The other variety of news trading involves unscheduled news where no official “release”  time exists. This can be related to geopolitics, such as Brexit, the US-China trade war, the covid-19 pandemic or other headline news that makes an appearance in the media for being too big to ignore. 

How are scalping and news trading linked?

The market typically reacts to news fast, and within a few minutes, it could be on its way to a new trend. This is why scalpers and news traders typically close out their trades in a matter of minutes. Some have a policy of never leaving a trade open from one day to the next; others, from one minute to the other.

Generally speaking, the shorter the time frame, the more unpredictable the market is. Not just because a sudden bit of news could come out, but also because someone could decide to enter a trade at that moment. If a hedge fund, for example, decides that they want to sell a few million shares of a particular stock, it’s going to go down, no matter what the best technical analysts say.

What is the best timeframe for scalping?

Typically, scalpers trade in the 5-minute timeframe. The 1-minute and 10-minute ones are also popular, but the typical set-up for a scalper is to use 5 minutes for trading. Meanwhile, watching the 1-hour timeframe to see where the overall trend is going is always a good idea. Generally, they try to congregate during the most active trading hours, when European and American traders are in the market, between 12 pm and 8 pm GMT.

An example trade in GBP/USD with a 10-pip profit target can be seen in the following chart.

Source: Dolphintrader.com

News traders also prefer short timeframes as well. Generally, they like to trade when there are the most news releases. This tends to be in the first hour or two of European trading hours and the first hour or two of US trading hours. Often, they will be on the one-minute timeframe for when the news comes out but then pull out to five or ten minutes to see if the momentum from the report is exhausted. Consequently, there is a little bit of an overlap between news traders and scalpers.

Manual or automatic? Which is better and why?

Scalpers and news traders thrive in times of market volatility. The more the market is likely to move, the more they will be able to make. But that means that there is significantly more risk since volatility equals risk. The critical aspect of being a profitable scalper is to figure out how to balance the risk-reward ratio of your strategy to make money in the long term.

Due to this high risk/reward situation, news traders and scalpers typically experience much variance in their accounts. That means they see a lot of profit and loss, and their account balance goes up and down quite a bit. The key is to make sure the losses are smaller than the gains!This constant up and down can be too stressful for some people, and it’s not uncommon for scalpers to experience burnout. Scalping requires attention and focus during the trading period, so it’s not really advisable if doing something else at the same time like an office job. However, as a way to trade in the hours before and after work, scalping can be an efficient way to go about controlling your time spent trading.

If you are going to be trading the news, you have to be there for when the news comes out and be lightning fast. Being even a few seconds late can make a huge difference between profit and loss. 

Some traders use automated trading to get around these issues associated with very short-term trading. You can set up algorithms to trade according to specific parameters and instructions based on how you deal. That way, you can take advantage of a trading situation without having to stress out about your trades and even staring at the screen all the time.

If you are using MT4, an Expert Advisor is the add-on that you can use to begin automated trading. One advantage computer algorithms have over humans is speed. That means an algorithm will be able to react more quickly to the news than a human would be able to, even with one-click dealing turned on in MT4. It will also earn more during news trading by executing trades in a matter of milliseconds, which means a better entry! Humans cannot do that, especially during highly volatile news such as the monthly NFP.

Risk vs Opportunity

The potential downside of automatic trading is that it’s automatic: i.e if something has changed that makes that trade no longer a good idea, the algorithm will go ahead and trade anyway because it trades precisely what it is programmed to. That’s why automated trading often requires a reasonable amount of supervision. 

If we take a moment to think rationally, if there were an algorithm that always worked and always made money without effort or supervision, there wouldn’t be any point in trading the markets and we’d all be millionaires!

The bottom line is that all investment comes with a risk. The more profit you want to make, the more risk you take. If you seek a trading style that will get you a nice sum of money, you must be aware of the risks involved and plan accordingly. 

Scalping and trading the news are just a couple of the different trading styles out there, and quite risky ones at that. If they suit your personality and trading psychology, great; if not, you can either create your own expert advisor for scalping and news trading or learn slightly longer-term trading strategies like how to swing trade.  

Don’t forget; you don’t need to trade yourself to extract profits from the market. So, you have to ask yourself: is your goal to make money or make a dream a reality? Both are plausible but require a different amount of effort and time.