Forex scalping is a prevalent day trading method that’s gaining plenty of popularity. Typically, users trade currencies while holding on to them for a very brief time.
Before stepping into the world of scalping in Forex, you should fully understand your potential upsides and downside risk. If you’re looking for comprehensive information on scalping on how to do it yourself, keep reading this in-depth guide.
What is Forex Scalping?
Forex scalping is a popular day trading style that involves buying and selling currency pairs using a brief holding time to ensure a series of quick profits.
A forex scalper focuses on making several trades by leveraging small price movements over the course of the day. Scalping refers to ‘skimming’ small profits daily by increasing position size several times throughout the day or week.
Typically, forex scalpers will hold trades for as little as a few seconds to as long as a few minutes. Usually, for a trader to consider this trading pattern scalping, it has to be bought and should be within minutes on the same day (in other words, a “day trade”).
How Does Forex Scalping Work?
While most day traders try to buy and sell a position once (or a handful of times) per day, scalping includes trading multiple times during a single trading session.
Moreover, day traders may trade-off between five or 30 minutes charts, whereas scalpers make trades based on one-minute or tick charts.
Scalping resembles another day trading method in which a forex trader opens a position and then closes it without carrying the position overnight (and into the next day).
However, the critical difference between regular day trading and scalping is the frequency and how quickly selling and buying occur.
Some Things to Consider if You Decide to Scalp
Trading can seem complicated and challenging if you’re not armed with the correct information. Here are the top things to keep in mind if you want to scalp:
Focus on Trading Your Liquid Pairs
Liquid pairs like USD/CHF, EUR/USD, USD/JPY, and GBP/USD ensure the tightest spreads. It is because they almost always have the highest trading volumes.
Since forex scalping requires you to buy and sell on the market frequently, you’ll want your spreads to be tight.
Learn to Trade During the Busiest Times of the Day
The most lucrative times of the day are when the Forex trading sessions overlap. The forex market never really closes, but different exchanges around the world are open at different times, as shown:
- London: 8 AM to 5 PM UTC
- New York: 1 PM to 10 PM UTC
- Sydney: 10 PM to 7 AM UTC
- Tokyo: 12 AM to 9 AM UTC
This means you’ll find the best deals and the most traffic between 2 AM to 4 AM, as well as 8 AM to 12 noon ET (when most exchanges overlap).
Make Sure You Account for the Spread
It’s no question that to perform scalping; you’ll have to enter the market frequently. This means spreads will be an integral component in your overall profit.
Since each trade has unique transaction costs, scalping on Forex may result in higher costs and lower profits. If your fees are higher than your profit, it would be like doing a job for $50 that costs you a $60 bus ride to get there.
Avoid lowering your ROI by ensuring your targets are at least double your spreads to help you hedge your account if (or when) the market moves against you.
Focus on One Currency Pair First
Scalping can be an intense undertaking. Your chances of having quick success are greater if you focus on one currency pair at a time. For example, focusing on just GBP/USD.
Trying to scalp various pairs simultaneously, especially as a beginner, puts your profits at risk. One currency pair provides more focus as you grow accustomed to scalping.
Once you grow accustomed to the pace of trading, you can try adding another pair to see how it goes.
Learn Proper Risk Management
Since forex scalping means making multiple trades in one day, you should have sound risk management practices.
With forex scalping, as with any type of trading, you should avoid risking more than you can afford to lose. Pay close attention to your risk-reward ratio, and don’t put yourself into debt.
Don’t Get Thrown Off by Major News
Slippage and volatility mean trading around major news events is a risky move. The last thing you want is to see sudden price jumps in the opposite direction of your trade.
Don’t place large “bets” because you think the market will go one way without doing due diligence yourself.
Instead, stay prepared for the future by staying up to date with economic events, such as the monthly release of the U.S. NFP report.
What are the Top Scalping Forex Strategies to Remember?
When it comes to Forex trading, you’ve likely learned there are a wide variety of strategies to choose from. Typically, a forex scalping strategy falls into one of the following broad categories:
- Range Strategies – involves identifying support and resistance areas, then buying near support and selling near resistance.
- Statistical Trading Strategies – identification of unique patterns and abnormalities in the market and craftily trading based on this insight.
- Trend Trading Strategies – involves trading based on trends in price charts.
- Countertrend Trading Strategies – involves trading against trends or taking an opposite position.
However, here are two popular scalping forex strategies that are based on trends and time-charts and more straightforward for beginners to grasp:
1-Minute Scalping Strategy
The 1-minute strategy is ideal for beginners since it’s pretty simple. That said, this strategy is demanding and requires high levels of concentration and constant attention.
Typically, you should be on the lookout for at least five pips (price interest point) for each trade. Since this is a relatively low monetary target, you may find yourself placing over 100 transactions every day.
An excellent way to put the 1-minute scalping strategy into practice is by setting a 1-minute chart timeframe. Next, make sure you’re trading within New York’s and London’s trading sessions when volatility is the highest (1 PM to 5 PM UTC).
Then traders can set their EMA (exponential moving average) to 50 and 100 periods and the Stochastic Oscillator (a price momentum indicator) to 5,3,3.
EMA and Stochastic Oscillator both provide signals for short and long orders. For short orders, scalpers have to wait for the 50 EMA to go lower than the 100 EMA and the Stochastic Oscillator to fall lower than 80.
On the other hand, long orders have kind of the opposite approach–instead of waiting for the 50 EMA to go below the 100 EMA, traders wait for the 50 EMA to go above the 100 EMA. This is an indication that an uptrend is likely.
Then, when the Stochastic Oscillator is above 20, and prices get close to the EMAs, scalpers can take a long position.
5-Minute Scalping Strategy
The 5-minute strategy is not just a longer play; you need to know other steps and considerations. You can use the 50-EMA and 100-EMA, just like you did with the 1-minute strategy. However, instead of the Stochastic Oscillator, you should use the MACD (Morning Average Convergence Divergence).
Generally, you should focus on at least ten pips on each trade while setting a MACD of 12,26,9.
For short traders, you should wait for the asset to drop below both the 50 and 100 EMAs. The best time to open a short position is once the MACD is at least five bars negative and the asset breaks below the 50 EMA by at least ten pips.
For long traders, forex scalpers should wait for the asset to go above both the EMAs and the MACD to cross to become at least five bars positive. Plus, you can exit in two halves: at two times risk and when the price breaks below 50 EMA.
Your initial stop should be set at five bars high from entry and exit in both short and long cases. You should make this at two times the risk while moving the stop to breakeven. Then, set the remainder stop to when the price breaks above the 50 EAM by ten pips.
If the price continues to trade between the 50 and 100 EMA, consider holding off from opening any position.
Forex Scalping Risks
Just like any other style of trading, forex scalping comes with several risks. While profits are likely to accumulate if you take many profitable trades, traders can have significant losses, especially when making risky trades.
Consider this– if you risk just a tiny amount per trade and make many trades, you can still have a considerable loss (if the majority of them lose you money). Additionally, too much capital in one risky scalping trade can cause you a significant loss in just one transaction.
Besides losing capital on regular scalping, leveraged and scaled-up positions can also pose a risk.
How to Set Up for Scalping?
Becoming a Forex scalper requires reliable access to the market makers and a platform that ensures fast selling and buying.
Typically, each trading platform comes with a buy and sell button for different currency pairs so that all you have to do is hit the right buttons. In liquid markets like Forex, executing this can take mere seconds.
Here is a step-by-step guide to set yourself up for forex scalping:
Pick a Broker
Keep in mind that forex trading is an international market that’s primarily unregulated. However, there is no shortage of forex brokers to choose from on the open market.
The governments and the industry are trying to introduce new legislation that will somewhat regulate OTC forex trading.
As a trader, it’s integral that you research and understand your broker agreement. You should also determine your responsibilities, as well as your broker’s.
You should also fully understand your risk and understand that there is a chance of losing money with any trades you make.
You can ask your broker questions about their policies and how to use their platform and keep the agreement documents safe and sound. Additionally, read the small print thoroughly.
Understand the Broker’s Platform
As a scalper, it’s your responsibility to become familiar with your broker’s trading platform. All brokers have different trading platforms. You can look at reviews and tutorial videos to figure out what platform is right for you.
Alternatively, you can open small practice accounts on many platforms to try them all out before you decide on one for good.
Make sure you fully understand how to use the platform. A trading mistake can cause significant losses. Avoid risking your profits and practice using the platform before fully committing real money to it.
As a forex scalper, your goal should be trading in the most liquid market. For example, if you’re trading a major currency pair like GBP/USD, you will want to be around and active on your trading platform when both the London and New York markets are open.
That means the most liquidity for the GBP/USD currency pair is between 1 PM to 5 PM UTC when both markets overlap.
Depending on the currency pair you choose, specific sessions will prove to be comparatively more liquid.
]Apart from New York and London, Tokyo and Sydney marketers are major volume drivers as well.
Redundancy refers to the practice of insuring yourself against sudden catastrophes. In the trading world, redundancy means learning how to enter and exit trades in multiple ways.
Make sure you’re connected to a fast internet connection but have a plan for what you’ll do if the internet stops working. Or, if your computer crashes, do you have a backup device you can trade from, like your smartphone?
You should also have the phone number for your broker’s dealing desk and be able to identify yourself quickly if it comes down to calling in a trade during an emergency.
Having a contingency plan outlined will help when you’re stuck and need to make a change quickly.
Tips for Preparing to Scalp
Create the perfect scalp by learning the following tips and tricks:
Following trends in the forex market is always a good idea for novice scalpers.
To discover current trends, you can add trend lines, moving averages, and Fibonacci levels to a weekly or daily chart. Many trading platforms have features to do this, and they help show support and resistance areas.
If your chart has a trend with an upward growth (increasing slope of the trendline as it moves left to right across the chart), then most traders will but at their support levels when they’re reached.
Conversely, if prices are sloping downward, most forex traders will sell when they hit their resistance level.
Use Trading Charts
Forex scalpers can use either a manual or automated scalping system.
A manual system is where the trader actively seeks signals and determines whether they should buy or sell. It requires a lot of attention with minimal distractions.
On the other hand, an automated system includes the trader virtually ‘teaching’ the software what signals they should look for and interpret them. Technical analysis, with its timely nature, makes real-time charts the perfect tool for scalpers.
Within their scalping system, a forex trader can create many price charts for a currency pair. To use these tools to their full extent, forex traders should create two charts: a 10-minute chart and a one-minute chart.
A 10-minute chart shows where the market is heading, and the 1-minute chart will help you decide when to enter and exit trades.
The Pros and Cons of Scalping
Just like any type of trading strategy, there is always uncertainty and thus a level of risk. While scalping can be a profitable strategy, it has some disadvantages too.
Let’s take a closer look at its pros and cons:
|Less exposure to risk||Requires lots of upfront capital|
|Profitability (through small, frequent gains)||Risky ( if not using 2% risk management rule)|
|Requires less market knowledge||Needs lots of focus and math skills|
The Bottom Line- Is Forex Scalping Profitable?
The forex market is highly volatile and hard to predict. Scalping is an easy method to make small gains on small, frequent trades. For the most part, if you put time and effort into scalping and make wise traders, it can be profitable.
Since the trades are small and frequent, profits are usually small, but your risk is small too. As such, scalpers can gain substantial profits over a long time horizon if they scalp successfully daily.
However, traders can get caught in an unprofitable situation if they frequently time their trades poorly and make uneducated position entry or exit. That is why all forex scalpers should mitigate their risk by following the 2% risk management rule.