Forex scalping or scalp trading is a form of a popular intraday trading strategy. While forex scalping is often used alongside, intraday trading, scalping is quite different.
Forex scalping is a type of intraday trading strategy. This is where the trader opens and closes a trade spanning a few minutes to an hour. With forex scalping, the goal is to find as many trading opportunities as possible. These trades focus on making a few pips in profit every time.
In terms of money management as well, forex scalping utilizes the concept of risking the smallest amount per trade. This way, one is able to control the exposure to their trading capital. At the same time, scalping allows you to capture consistent profits.
For example, a forex scalper’s daily goal may be to take in 10 – 15 pips a day. These 10 – 15 pips can come out of multiple trades, or just one. However, in most cases, forex scalpers focus on multiple trades to better their returns.
Forex scalping is dynamic and requires a lot of dedication. Furthermore, traders should also focus on their risk management principles as well. The key is to find a balance between not to over-trade while at the same time, maintaining a consistent profit.
Since forex is traded on leverage, the gains, in most cases tend to be magnified. Forex scalping is quite simple, but the approach one takes can vary. Unlike other forms of trading, forex scalping works only if you are able to dedicate time daily or a few times a week.
If you are looking to understand how forex scalping works, then this is a must-read guide for you to learn how to scalp the forex markets.
In many ways, forex scalping, and day trading or intraday trading are terms used interchangeably. While forex scalping is in a way a kind of day trading method, it is somewhat different.
The main differentiating factor with forex scalping is that the trader aims to capture small pips in profit, but with larger positions. As one may know, a standard lot size of one lot is equal to 100,000 units of the quote currency.
Thus, the pip value for four decimal places forex instruments is $10.
Therefore, by trading one lot, a forex scalper can aim for 5 pips in profit. In dollar value, this would be equal to $50.
Of course, the return one gets relative to their trading capital can differ. This is determined by the use of leverage. If for example, a trader with a capital of $100,000 and leverage of 1:100 targets $100 or 10 pips, that equates to 0.1% in profit.
While this may seem small, over a period of time, the profits can add up.
Of course, the trick is to maintain consistency and balance. Many traders end up over-trading (i.e: trading more than required) or not paying attention to their risk management.
Either of these risks can quickly impact your trading capital. There is a good chance that the scalper will lose all the profits they make, or worse, lose their trading capital too.
Hence, forex scalping, while easy on paper requires a lot of dedication and hard work. It is also quite different from intraday trading as well.
If you read around any topics about forex scalping, you will often come across these articles suggesting some technical indicators.
The truth is that you can use just about any technical trading indicator that you want. The key is in using this indicator to work with a scalping strategy. This means, having to find a trading strategy that can use any indicator. But the focus would be to capture a few pips of profits every day.
This can be done using any technical indicator. Many traders fall into the trap that only a specific set of indicators work best with scalping. Contrary to this thinking, you can find any technical trading indicator to scalp the forex markets.
For example, you can use a 2 and 5-period moving average in order to identify the very short-term trend in the market. Using other tools, you can then devise a trading plan accordingly.
One of the most important aspects when scalping the forex markets is the prices themselves. Traders need to ensure that they take profit and stop loss levels are fixed. Moving around these levels when the trade is open can lead to too many variables.
This can in turn affect your consistency in being able to reap the benefits of scalping the forex markets.
As a trader who is interested in scalping the forex markets, it is best that you focus on technical indicators that you can modify. This will enable you to build a custom trading system that can work for you.
There are many strategies per se, that one could use to scalp forex. But among these different types, a few stand out.
Breakout trading is where prices tend to remain in a consolidation, before snapping out of the range. This breakout is usually led by a strong momentum. The rapid decline or fall of prices can provide good scalping opportunities.
Breakouts can occur at any time. However, forex scalpers focus on currency pairs such as GBPUSD to trade the London breakout session. This is when the London market opens, and it leads to high volatility. Thus, a breakout in the GBPUSD currency pair can be seen very frequently in the mornings.
While there is no perfect science of trading such breakout methods, the trick is to identify the potential breakout. This can be seen when price action tends to move in a sharp sideways range. This extended period of sideways movement eventually leads to a strong breakout in the market.
You can trade the breakout trading method by using technical indicators or by price action itself. Scalpers prefer to use the Bollinger band indicator, which is great to distinguish periods of high and low volatility.
Traders also make use of price action itself, such as identifying the price range and potentially ascertaining which way price would break out.
Volatility breakout for scalping is quite close to the breakout trading. But here, the focus is on watching the volatility itself.
Traders do this by observing technical indicators such as the standard deviation, or the average true range indicators.
These oscillators can provide great insights into the rise and fall of volatility. In the financial markets, higher volatility tends to see a larger price fluctuation.
Therefore, this method is also quite profitable when looking for a scalping strategy in the currency markets.
Volatility breakout is however not that easy and requires a bit of market trading experience. Hence, it is not recommended for beginners. It would be ideal to start using volatility indicators and understand how price action works, relative to the signals from these indicators.
Trading on the fundamentals is another way traders utilize volatility. Typically, there are many news events that occur round the clock.
However, some news events garner bigger attention than the rest. Examples of these include the central bank interest rate decisions, or the GDP, inflation, and unemployment numbers.
Sometimes, speeches by central bankers can also move the markets quite a bit.
Trading with news requires a bit of experience with both fundamentals and technical. This means that the scalper should understand how the markets will react to the news.
Trading based on news often leads to high volatility and sometimes quick profits (and losses). And quite a few forex brokers don’t allow news based trading. Therefore, before you get into news-based trading it is best to check with your forex broker if this is allowed.
Another risk of news-based trading is that the high volatility can lead to widening spreads. This can be observed if you watch variable spreads. The bid and ask prices tend to deviate quite a bit can easily trigger your stops.
Potential forex scalpers should know that trading based on the news is not straightforward. Markets can react differently to the same outcome the next time.
Therefore, traders need to be subjective when it comes to news-based trading. This is akin to price action trading, which also requires some subjectivity.
Similar in structure to breakout trading, trend consolidation breakout is a bit easier to handle.
When price moves in a strong trend, it tends to take a pause. This period can be seen in some price action patterns such as bullish or bearish flags and pennants patterns, etc. Identifying such continuation patterns can lead to a higher probability of winning trades.
In order to be successful with trend consolidation breakout, forex scalpers should be adept at reading price action patterns. Since these patterns can form anywhere, focusing on the smaller chart time frames can help.
At the same time, traders should also pay attention to the higher chart time frames to understand the prevailing trends. In other words, trend consolidation breakout is best utilized when combining multiple time frame analyses.
Just about any currency pair or commodity CFD is great for scalping the markets. Each of these financial instruments can behave differently under different circumstances.
It is up to the trader to understand how each of these instruments behaves and then pick a select few.
One of the key things to be successful with forex scalping is to stick with currency pairs or commodities that you are familiar with.
For example, crude oil CFDs can be volatile during the weekly crude oil inventory report. Likewise, the JPY can gain volatility during times of market panic.
At the end, traders should find which instrument works best for them if they want to pursue a forex scalping strategy.
Broadly speaking, JPY currency pairs are quite volatile than many of their peers.
Therefore, yen crosses such as EURJPY, GBPJPY, NZDJPY make for good currency pairs for scalping. But traders should bear in mind that the spreads for these instruments are also higher.
Consequently, when trading such instruments, the stop losses and take profits, which are crucial for scalping should be chosen carefully.
Likewise, when trading commodities, the tick value should be considered. Since commodities have a higher dollar value per tick than forex, it can get risky. This is especially true during volatile moments such as news releases etc.
When trading commodity CFDs, a forex scalper should be disciplined enough to exit the markets when they are wrong. The moment, the trading rules are ignored, you can end up risking a lot more. This will in turn put your entire trading capital at risk.
There are no written ground rules that will guarantee you profits in forex scalping.
But there are a few things that traders can bear in mind. It will help you to manage risk and build consistent profits.
- Focus on a few instruments to begin with. Try to gain as much familiarity of these instruments before branching out to using more. Traders get greedy and end up attempting to scalp the forex markets as much as possible. This can lead to holding on to too many trades.
- Set a daily and weekly goal including the profit and loss levels in terms of pips or dollar value. It will bring you discipline and tells you when it is time to stop trading. Forex scalping is dynamic and can be very tempting to trade more and more.
- Stop overtrading. This ties in closely with the previous point. Over trading is when you take on too many trades. Not only does it increase your risk of losing money, but it also proves to be expensive over time. Besides the daily and weekly goal, focus on limiting yourself to a certain number of trades per day.
- Find a balance between mechanical and proprietary systems. Traders end up focusing too much on building a mechanical trading system. But finding a balance will allow you to trade more responsibly and adapt to changing market conditions.
- Stick to a trading system. The moment a scalping strategy fails, traders jump to the next strategy. This will not go very far when it comes to finding consistency in the markets. Therefore, traders should pick a trading system that they like and trade with it. This will get you familiar with the trading system and you can also find its weakness and strengths.
In conclusion, forex scalping may seem easy. However, the analysis that goes behind it still remains the same. Forex scalping will not give you higher profits than swing trading. It also requires a certain mindset and takes a bit of time and dedication.