Scalping is like those high-action thriller movies that keep you on the edge of your seat. It’s fast-paced, exciting, and mind-rattling all at once.
Scalp trading, also known as scalping, is a popular trading strategy characterized by relatively short time periods between the opening and closing of a trade.
What Is Scalping in Forex?
Scalping in forex is a short-term strategy that aims to make profit out of tiny price movements. The best forex scalping strategies involve leveraged trading. Using leverage in forex is a technique that enables traders to borrow capital from a broker in order to gain more exposure to the forex market, only using a small percentage of the full asset value as a deposit. This strategy magnifies profits but it can also magnify losses if the market does not move in a favourable direction to the bet. Therefore, forex scalpers are required to keep a constant eye on the market for any changes.
In the forex market, another name for the smallest price movement a currency can make is a pip (percentage in point), which traders use to measure profits and losses. Forex scalpers usually aim to scalp between 5 – 10 pips from each position, aiming to make a more significant profit by the end of the day. Forex scalping is a form of arbitrage trading.
So, scalping in the Forex market is essentially taking advantage of minor changes in price over a short period of time.
What makes scalping so attractive to traders?
Smaller moves happen more frequently than larger ones, even in relatively calm markets. This means that there are many small movements from which a scalper can benefit.
Scalpers can place up to a few hundred trades in a single day, seeking small profits.
All positions are closed at the end of the trading day.
Because scalpers basically have to be glued to the charts, it is best suited for those who can spend several hours of undivided attention to their trading.
It requires intense focus and quick thinking to be successful. Not everyone can handle such fast and demanding trading.
It is not for those looking to make big wins all the time, but rather for those who like raking in small profits over the long run to make an overall profit.
The strategy behind scalping is that lots of small wins can easily morph into large gains.
These small wins are achieved by trying to profit from quick changes of the bid-ask spread.
Scalping focuses on larger position sizes for smaller profits in the shortest period of holding time: from a few seconds to minutes.
The assumption is that price will complete the first stage of a movement in a short span of time so you aim to take advantage of market volatility.
The main goal of scalping is to open a position at the ask or bid price and then quickly close the position a few points higher or lower for a profit.
A scalper wants to quickly “cross the spread“.
For example, if you go long EUR/USD, with a bid-ask spread of 2 pips, your position instantly starts with an unrealized loss of 2 pips.
Remember, when you buy, you buy at the ask price. But in order to exit, you need to sell, which is the bid price.
A scalper wants that 2-pip loss to turn into a gain as fast as possible. In order to do this, the bid price needs to rise enough so it’s higher than the ask price that the trade initially entered at.
Are you a Forex Scalper?
| YES if | NO if |
| – You like fast trading and excitement. – You don’t mind being focused on your charts for several hours at a time. – You are an impatient person who doesn’t like to wait for long trades. – You can think fast and change bias, or direction, quickly. – You have fast fingers (put those esports skills to work!) – You are a surgeon! | – You easily get stressed in fast-moving environments. – You can’t commit several hours of undivided attention to your charts. – You’d rather make fewer trades with higher profit gains. – You like taking your time to analyze the overall picture of the market. |
Some things to consider if you decide to scalp:
Trade only the most liquid pairs
Pairs such as the EUR/USD, GBP/USD, USD/CHF, and USD/JPY offer the tightest spreads because they tend to have the highest trading volume.
You want your spreads to be as tight as possible since you will be entering the market frequently.
Trade only during the busiest times of the day
Forex markets are open 24 hours a day, so theoretically you can scalp forex whenever you want. But as we cover above, you’ll want to ensure that you have sufficient liquidity to enter and exit positions quickly – and keep your spread costs low.
Liquidity tends to peak when two sessions overlap, which happens three times each day:
- New York and London from 1pm to 4pm (UTC)
- Tokyo and Sydney from 12am to 7am (UTC)
- Tokyo and London from 8am to 9am (UTC)
Make sure to account for the spread
Because you enter the market frequently, spreads will be a big factor in your overall profit.
As each trade carries transaction costs, scalping can result in more costs than profits.
That’s like working for an hour in a job that pays $5/hr and then going out and buying a $6 Starbucks Caramel Ribbon Crunch Frappuccino.
Be sure your targets are at least double your spread so that you can account for the times the market moves against you.
Try focusing on one pair first
Scalping is very intense and if you can put all your energy in one pair, you’ll have a better chance at being successful.
Trying to scalp multiple pairs simultaneously as a noob will almost suicidal.
If you start to get accustomed to the pace of things, then you can start by adding on another pair and see how it works for you.
Make sure you follow good money management
This goes for any type of trading, but since you are making so many trades within a day it is especially important that you are sticking to risk management practices.
Major news reports can throw you off
Because of slippage and high volatility, trading around highly anticipated news reports can be very dangerous.
It sucks when you unexpectedly see price jump in the opposite direction of your trade because of a news report!
Be prepared and know what’s coming out by checking out the economic calendar.
Best indicators for scalping forex
To scalp forex, you’ll want to use indicators that can give you lots of opportunities you can execute quickly each session. Some popular options include:
- RSI. The relative strength index (RSI) is an oscillator that evaluates recent price action to give a reading between 0-100. Anything under 30 is usually viewed as oversold, while over 70 is overbought
- Bollinger bands. Bollinger bands can be used to give instant insight into a market’s current volatility – and when the price moves beyond either of the outer bands, it may present a chance to trade
- Stochastic oscillator. Like the RSI, the stochastic is an oscillator that tells you a market’s current momentum with a reading between 0-100. However, it does so by comparing an FX pair’s closing price to the range of its recent closes
- Moving averages (MA). As we saw in our example, MA crossovers are often seen as a sign of an impending trend. Or you can use moving average convergence divergence (MACD) to spot new signals
However, you don’t have to use indicators when scalping forex. Lots of traders use price action alone, looking for certain candlestick patterns that have previously led to a specific movement.
Automated forex scalping
Scalping requires you to pay close attention to the markets whenever you’re active, reacting instantly to price action and sticking rigidly to a set plan. So, it may not surprise you to learn that lots of FX scalpers have chosen to automate their plans, using scalping software to execute trades instead of doing so manually.
Remember, though, that there are no easy get-rich-quick schemes in trading. Often, setting up software to trade the markets successfully requires more work than doing so yourself – and you’ll still need to constantly monitor and tweak your algorithm to ensure it doesn’t let you down.
Forex scalping tips
Use stops and limits. Stops and limits help ensure that you don’t hold positions for too long, which can be devastating to your bottom line when scalping. Ideally, you’ll never open a position without at least a stop in place
Consider the 1% rule. The 1% rule involves never risking more than 1% of your total balance on any single position. If you have an account worth $10,000, for example, you’d only ever risk $100 on one opportunity.
Make a trading plan before you start. Scalping requires discipline, and the best way to stay disciplined is to set out a strict set of rules before you open a single position. The more comprehensive your plan, the better your chances of success
