You have heard much about it, some of it is good, much is bad, but there are some traders that do it because:
Scalping can be done in a relatively small time frame
Scalping limits exposure to the markets adverse turns
Scalping offers more winning trades for an experienced trader
Most traders avoid being in the market around the time that an economic news report is to be released – with good reason, who can accurately predict what the market will do at the time of the report release and thereafter.
There are some traders that have studied the market reaction prior to, during and after an economic news release, and have learned that certain patterns are consistent nearly every time.
These patterns are:
10 to 20 minutes prior to a news release, the market weakens
The first minute or 2 when the news is released, the market is volatile
After the release, the market moves in favor of the currency benefited
The above market conditions do not happen all of the time, but most of the time. They happen enough that an experienced trader can depend upon the “probability” of market conditions to prevail that are favorable to a profitable “scalp”.
Let’s look at these patterns:
Market weakens prior to the news release;
The economic news release offers up an unknown risk for the inexperienced trader since there is no way to predict the outcome of the report, so, traders move out of the market.
If the market is over-bought, the traders need to sell in order to liquidate their position, and the market goes down, if the market is over-sold, traders need to buy in order to liquidate their position, and the market goes up
There is an opportunity to “scalp” in this situation, since the broker spread is usually minor with certain currency pairs.
This situation appears nearly all of the time in an over-sold or over-bought market.
The first minute or 2 of the news release;
Those traders who have up to the minute access to the news report will have an opportunity to take advantage of the situation the moment the report is released – several things will be apparent
The traders who have remained in the market will need to deal with one of 2 situations – if the report is such that it favors the currency they are trading, nothing need be done.
However, if the report is not in favor of the currency they are trading – it will be necessary for them to close their trade as soon as possible to minimize loss, this will cause some volatility.
Those traders who are not in the market but understand the reports influence on the market will want to take advantage as soon as possible, adding to the movement of the market.
Now enter the unexpected report – where the actual report itself is different from the forecast by a sizable margin, all traders are surprised and react.
The market, in a matter of a few seconds, moves violently as traders try to compensate, the broker “spread” may increase by a huge amount, and the “slippage“ w.ill be huge as well. Not a pretty sight for those caught in the market going in the wrong direction.
The market moves in favor of the currency benefited;
After the report has been filed and any revision made to the reports previous value, and the traders have had a chance to decide the best course of trading action to take – usually after about 3 to 5 minutes, the market may move in favor of the benefiting currency. That is, unless some surprise, unexpected outside event happens.