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A simpleton's view of forex scalping

Forex scalping is a day trading method employed by forex traders that entails buying or selling currency pairs with only a short holding time in order to achieve a series of fast profits. A forex scalper seeks to make a high number of transactions while capitalising on the tiny price swings that occur throughout the day. While scalping seeks tiny gains of 5 to 20 pips each trade, the reward on these transactions may be enhanced by raising the position size.

Forex scalpers generally hold transactions for seconds to minutes at a time, opening and closing several positions in a single day.

Scalping is similar to day trading in that a trader will initiate and terminate a position within the current trading session, never continuing a position into another trading period or holding a position overnight. While a day trader may try to enter a position once, twice, or even several times each day, scalping is far more frantic and will trade numerous times within a session.

Whereas a day trader may use five- and 30-minute charts, scalpers frequently use tick and one-minute charts. Some scalpers, in particular, prefer to try to capture the high-velocity changes that occur around the publication of economic data and news. Such news may include the release of job statistics or GDP figures, depending on what is high on the trader's economic agenda.

Scalpers want to try to scalp five to ten pips from each transaction they make and to repeat this procedure throughout the day. Pip is an abbreviation for "percentage in point," and it refers to the lowest possible exchange price fluctuation for a currency pair. Using high leverage and taking only a few pips profit at a time might pile up. Scalpers achieve the highest returns when their transactions are lucrative and can be performed several times during the day.

Remember that the average value of a pip in one ordinary lot is around $10. So, for every five pips gained, the trader can earn $50 at a time. This would amount to $500 if repeated ten times every day.


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Key trading points to remember about scalping trading strategy

Forex Scalping Explained

Forex scalpers often use leverage, which allows for greater position sizes and enables for a minor price shift to yield a meaningful profit. For example, a five-pip profit in the EUR/USD on a $10,000 position (mini lot) is $5, but a five-pip movement on a $100,000 position (regular lot) is $50.

Manual or automatic Forex scalping tactics are available. A manual system entails a trader sitting in front of a computer screen, looking for indications and deciding whether to buy or sell. Programs are used in an automated trading system to notify trading software when to buy and sell depending on entered criteria.

Scalping is common in the aftermath of major data releases, such as the US jobs report and interest rate announcements. These high-impact news releases create big price movements in a short period of time, which is great for scalpers who want to get in and out of trades rapidly.

Position sizes may be reduced to mitigate risk as a result of increasing volatility. While a trader may seek to make 10 pips on a transaction, they may be able to catch 20 pips or more in the wake of a large news release, for example.

Scalping as a Forex Trading Strategy: An Overview

Forex scalping is the practise of purchasing and selling foreign currencies in order to benefit from changes in exchange rates. The international currency market is the world's largest, with about $6.5 trillion traded across currencies on a daily basis.

Traders and investors can take short-term positions in currencies and then record an offsetting deal. The difference between the original trade's exchange rate and the exit trade's exchange rate results in a gain or loss.

For example, if a US trader began a buy position in euros at the euro-to-US dollar exchange rate of $1.1050 and subsequently sold the position at a rate of $1.1150, the profit would be 0.0100 or 100 pips, or around 1%.

A forex scalping trading strategy may have a profit objective of as little as 10 or 20 pips. To maximise earnings, the scalper would start many transactions or increase the position size of each trade.

Popular Currency Exchange Rate Combinations for Scalping

Although there are several exchange rate pairings available for trading, the key pairs that most traders employ in their day-to-day transactions are listed here.

Forex Scalping Instruments

A manual forex scalping trading method, in which the trader looks for signs and decides whether to buy or sell, is one option. Many scalpers, however, employ automated trading systems while placing trades with their brokers. The trader tells the system what signals to look for and what to do when a signal is triggered.

Using the previous example of the US trader who opened a buy position in euros at the euro-to-US-dollar rate of $1.1050 and sold for a profit at $1.1150, the trader might have automated the take-profit order. In other words, when the EUR/USD rate rose to $1.1150, a trade might have been automatically executed, closing the position for a profit.

In addition, the trader may have automated a stop-loss order if the rate went against the position. As an example, if the stop-loss order was placed at $1.10, a transaction would be immediately started whenever the exchange rate triggered $1.10 to unwind the position. Stop-loss orders are essential for risk management with scalping tactics since they restrict trading losses.

Because technical analysis is so rapid, real-time charts are the instrument of choice for forex scalpers. Technical analysis identifies trading opportunities by analysing volume, price momentum, and volatility. In technical trading, currency values that break out of a recent range or break higher or lower than the previous day's close are also utilised. Forex scalping trading systems frequently include a combination of automatic trades driven by technical analysis and charting cues.

Forex Scalping Pros

Scalping has become a feasible method for retail forex traders as a result of the low barriers to entry into the world of forex trading. Scalping is popular among newbies since it needs less market knowledge and established trading ideas.

Because the forex market is vast and liquid, traders may readily enter and exit trading positions.

Scalping is an excellent option for people who dislike waiting for a deal to close. Positions are often kept for a relatively short term, which reduces the likelihood of reversals that might impair a trading position.

The Drawbacks of Scalping

It's vital to remember that a forex scalper often demands a greater deposit that can manage the level of leverage the trader must use to make the short and tiny transactions viable. Leverage is a type of margin in which the trader borrows from the broker to increase the size of the position. Leverage, on the other hand, may compound both earnings and losses.

Profits are reduced on each deal, making it difficult to meet a trader's financial goals. For many traders, a "5-pip" yield on a deal may be inadequate.

Because of the modest amount of profit each trade, a single trading loss might wipe out the profits from numerous successful deals. Good transactions might have a risk-reward ratio of one to one or less.

Currency market volatility or extreme fluctuations can add to scalping gains and profits while also exacerbating losses. Forex scalping can be dangerous and result in the loss of a trader's brokerage account. For example, a trader may not have an exit plan or a stop-loss transaction that automatically unwinds the deal. If the transaction swings against the forex trader, he or she may suffer frequent and severe losses. As a consequence, beginners in forex trading should learn the ins and outs of forex scalping before making their first transaction.

Personality that Scalps

Scalping, on the other hand, is not for everyone. This perilous technique need a certain mindset. Scalpers must appreciate sitting in front of their computers for the duration of the session, as well as the extreme focus required. When scalping a minor shift, such as five pips at a time, you cannot take your eye off the ball.

Even if you believe you have the temperament to sit in front of a computer all day (or all night if you are an insomniac), you must be the type of person who can respond swiftly without overthinking every step. There is no time to ponder. A scalper's ability to "pull the trigger" is a vital important characteristic. This is especially true when attempting to close a position if it moves against you by even two or three pips.

Scalping vs. Market-Making

Scalping is analogous to market-making in certain ways. When a market maker purchases a position, the goal is to instantly counterbalance that position and collect the spread. This type of market-making does not relate to bank traders who take proprietary positions on behalf of the bank.

The distinction between a market maker and a scalper, on the other hand, is critical to comprehend. A market maker gains the spread, whereas a scalper pays it. When a scalper buys on the ask and sells on the bid, they must wait for the market to move sufficiently to cover the spread they have just paid. The market maker, on the other hand, sells on the ask and buys on the bid, receiving a pip or two as profit for forming the market.

Although they both want to go in and out of positions rapidly and frequently, the risk of a market maker is far smaller than that of a scalper. Market makers adore scalpers because they trade frequently and pay the spread, which implies that the more the scalper trades, the more the market maker earns from the spread (one or two pips).

Things a good trader must do to become a better Forex scalper

To become a scalper, you must have extremely excellent, consistent access to market makers, as well as a platform that allows for very quick purchasing or selling. Typically, the platform will feature a buy and sell button for each currency pair, so all the trader has to do is press the proper button to enter or exit a position. Execution can happen in a fraction of a second in liquid marketplaces.

Choosing a Broker for Scalping forex

Remember that the forex market is an international market that is mostly uncontrolled, while governments and the industry are working to create laws that would regulate over-the-counter (OTC) forex trading to some extent.

It is your responsibility as a trader to research and comprehend the broker agreement, as well as your obligations and the broker's responsibilities. You must be aware of how much margin is necessary, as well as what the broker will do if positions go against you, which might result in an immediate liquidation of your account if you are overly leveraged. Inquire with the broker's representative and keep the agreement paperwork safe. Examine the fine print.

The Platform of the Scalping Forex Broker

As a scalper, you must get highly familiar with the trading interface provided by your broker. Because different brokers may provide different platforms, you should always establish a practise account and practise using it until you are entirely acquainted with it. Because you want to scalp the markets, there is no tolerance for error in how you use your platform.

If you accidentally pressed the "Sell" button when you meant to touch the "Buy" button, you could get fortunate and benefit from your error, but if you are not so lucky, you will have simply entered a position opposite to what you wanted. Such blunders might be quite expensive. Platform errors and negligence may and will result in losses. Before you invest real money in a transaction, practise utilising the site.

Liquidity for Forex Scalping

You want to trade the most liquid markets as a scalper. These markets are often in significant currency pairings like EUR/USD or USD/JPY. Furthermore, depending on the currency combination, certain sessions may be significantly more liquid than others. Even though the forex markets are open 24 hours a day, the volume is not consistent throughout the day.

Volume often increases when London opens at roughly 3 a.m. EST, as London is the primary trading hub for currency trading. New York opens at 8 a.m. EST, adding to the volume transacted. As a result, when two large forex hubs are trading, it is generally the ideal moment for liquidity. The marketplaces of Sydney and Tokyo are the other significant volume generators.

Scalping Order Executions must be Guaranteed by your Broker

Scalpers must be certain that their transactions will be executed at the levels they specify. As a result, be sure you understand your broker's trading terms. Some brokers may restrict their execution guarantees to periods when markets are not moving quickly. Others may not offer any kind of execution guarantee at all.

Slippage occurs when you place an order at a given level and it is executed a few pips away from where you meant. As a scalper, you cannot afford slippage on top of the spread, therefore you must ensure that your order can and will be executed at the level you specify.

Redundancy of your internet connection for forex scalping

The concept of insuring oneself against disaster is known as redundancy. In trading language, redundancy refers to the capacity to enter and exit deals in more than one method. Make certain that your internet connection is as fast as possible. Prepare for what you'll do if the internet goes down. Do you have a phone number that connects you directly to a dealing desk, and how quickly can you get through and identify yourself? When you are in a situation where you need to get away fast or make a change, all of these things become extremely crucial.

Risks of Forex Scalping

Forex scalping, like all other types of trading, is not without danger. While gains can quickly increase if a large number of winning transactions are executed, losses can also quickly accumulate if the trader does not know what they are doing or is employing a defective strategy. Even if you are just risking a tiny sum every trade, taking multiple transactions might result in a big loss if many of them are losers.

Leverage and enlarged position sizes can also be dangerous. Assume a trader has $10,000 in their account but uses a position size of $100,000. This translates to a 10:1 leverage. Assume the trader is ready to risk five pips on each transaction and seeks to exit with a profit of ten pips.

This is a viable technique, but the trader may not always be able to exit for a five-pip loss. The market may gap through their stop loss point, causing the trader to exit with a 20 pip loss and lose four times as much as intended.

This condition, known as slippage, is prevalent after important news announcements, and a few slippage scenarios can quickly drain an account.

Forex Scalping Techniques

There are numerous trading methods, however they often fall into only a few main categories:

Choosing a Time Frame for Charting for Scalping

To execute trades again and over again, you'll need a method that you can almost completely automate. Because scalping does not allow for in-depth study, you must have a strategy that you can employ again with a reasonable level of confidence. Scalpers require very short-term charts, such as tick charts, one- or two-minute charts, and maybe a five-minute chart.

Get a Glimpse of Where You're Going

Trading with the trend is usually beneficial, especially if you are a rookie scalper. Set up a weekly and daily time chart and put trend lines, Fibonacci levels, and moving averages to uncover the trend. These are your "lines in the sand," so to speak, and will reflect regions of support and opposition. If your charts reflect an upward trend (prices sloping from the bottom left of your chart to the top right), then you should purchase at all support levels if they are achieved.

If, on the other hand, your chart's prices are sloping from top left to bottom right, aim to sell once the price reaches a resistance level. Depending on the frequency of your transactions, you may use various types of charts and moving averages to assist you predict direction.

Make your trading charts

A forex scalping strategy can be manual, in which the trader searches for signals and decides whether to buy or sell, or automated, in which the trader "teaches" the software what signals to look for and how to interpret them. Because technical analysis is so rapid, real-time charts are the instrument of choice for forex scalpers.

Create a 10-minute and a 1-minute chart. Use the 10-minute chart to obtain an idea of where the market is trading right now, and the one-minute chart to initiate and exit transactions. Make sure to configure your platform such that you may switch between time periods.

System of Trading

We've incorporated a three-period RSI with plot guidelines set to 90% and 10% in the method illustrated here, and there are many different systems you may use to trade effectively. Only trades on the short side are placed once the RSI crosses over the 90 percent plot guide, and only trades on the long side are entered once the RSI falls below the 10 percent plot guidance. To fine-tune the signal, wait for the second crossing into either of the two zones (only accept the trade if the RSI enters the zone—either the 10% for longs or the 90% for shorts—on the second consecutive try).

Now, before you use the aforementioned technique, try it on a practise account and keep track of all your winning and losing transactions. Rather than depending on the technique itself, it is frequently the manner you handle your transactions that will make you a profitable trader.

In other words, cut your losses as soon as possible and capture your winnings when you have seven to ten pips. This is a scalping approach, not one for holding holdings during pullbacks. If you discover that you can handle the system and pull the trigger swiftly, you may be able to repeat the procedure several times in a single trading session and earn a substantial return.

Keep in mind that too much analysis might lead to paralysis. As a result, practise the process until it becomes second nature to you, and even dull because it is so repetitious. You're in the scalping industry to earn a profit, not to get a rush of adrenaline or to feel like you're at a casino. Professional traders are not gamblers; they are speculators who understand how to evaluate risk, wait for favourable odds, and regulate their emotions.

In today's computerised marketplaces, the tactics of scalpers are less reliable

Scalpers benefit from modest market changes by taking advantage of a ticker strip that never stops moving. For years, this quick-fingered day trader depended on Level 2 bid/ask screens to find buy and sell signals, reading supply and demand imbalances away from the National Best Bid and Offer (NBBO)—the bid/ask price that the ordinary person sees. They would purchase when technical conditions drove the ask price lower than usual and sell when technical conditions pushed the bid price higher than normal, booking a profit or loss minutes later when the spread returned to balanced conditions.

However, that paradigm no longer works as well in contemporary electronic marketplaces for three reasons. First, following the 2010 flash collapse, the order book was permanently empty since deep standing orders were targeted for destruction on that chaotic day, requiring fund managers to keep them off-market or execute them in alternate venues.

Second, high-frequency trading (HFT) currently dominates intraday trades, resulting in dramatically shifting data that makes market depth analysis difficult. Finally, the vast majority of trades are now conducted outside of exchanges in dark pools that do not provide real-time reporting.

Best Indicators to use for Forex Scalping

Scalpers can tackle the challenges of this period by using three technical indicators designed specifically for short-term opportunities. These real-time tools employ signals similar to those used in longer-term market strategies, but they are applied to two-minute charts.

They operate best when the intraday tape is strongly moving or range-bound; they don't perform so effectively when there is disagreement or misunderstanding. You'll know such circumstances are there when you're being whipsawed into losses at a faster rate than is common on a profit-and-loss curve.

Moving Average Ribbon Entry Strategy

Put a 5-8-13 simple moving average (SMA) combination on the two-minute chart to identify strong trends that may be purchased or sold short on counter swings, as well as to obtain a heads-up on coming trend shifts that are unavoidable throughout a normal market day. This scalp trading approach is simple to learn. During strong trends that keep prices attached to the 5- or 8-bar SMA, the 5-8-13 ribbon will align, signalling higher or lower.

Intrusions into the 13-bar SMA indicate decreasing momentum, favouring a range or reversal. During these range fluctuations, the ribbon flattens down, and price may regularly crossed it. The scalper then looks for realignment, with ribbons rising or falling and spreading out, indicating greater space between each line. The purchase or sell short signal is triggered by this little pattern.

Relative Strength/Weakness Exit Strategy

How does a scalper decide when to grab gains and when to cut losses? 5-3-3 Stochastics with a 13-bar, 3-SD Bollinger Band used in conjunction with ribbon signals on two-minute charts perform effectively in actively traded markets such as index funds, Dow components, and other widely held securities such as Apple Inc. (AAPL).

When Stochastics turns higher from the oversold level or lower from the overbought level, the finest ribbon trades form. Similarly, when the indicator crosses and rolls against your position after a profitable shove, you must exit immediately.

You may timing the exit more accurately by observing the interplay of the band with the price. Profit from band penetrations since they anticipate that the trend will stall or reverse; scalping techniques cannot afford to wait for any kind of retracement. Also, if a price push fails to hit the band but Stochastics rolls over, this is a signal to leave.

Once you're satisfied with the process and interplay of technical aspects, you may increase the standard deviation to 4SD or decrease it to 2SD to accommodate for daily swings in volatility. Better still, superimpose the additional bands on top of your present chart to acquire a wider range of signals.

Scaling Multiple Charts

Finally, open a 15-minute chart with no indicators to monitor background variables that may have an impact on your intraday performance. Include three lines: one for the initial print and two for the high and low of the trading range that formed during the first 45 to 90 minutes of the session. Keep an eye out for price activity at those levels, as it will build up larger-scale two-minute buy or sell signals. In fact, you'll discover that your best trading days occur when scalps correlate with support and resistance levels on the 15-minute, 60-minute, or daily charts.

Scalpers can no longer rely on real-time market depth research to provide them with the buy and sell signals they require to record several tiny profits in a normal trading day. Fortunately, they can adapt to today's technological world and employ the technical indicators discussed above, which are tailored to extremely short time frames.

An Example of EUR/USD Scalping

Assume a forex scalper uses a trend trading method to trade the EUR/USD. They identify the most recent trend, wait for a pullback, and then purchase when the price begins to move back in the direction of the trend.

The trader normally risks four pips and takes profit at eight pips, depending on volatility. The return is double the risk, resulting in a good risk/reward ratio. When volatility is more than normal, the trader will risk more pips in order to make a larger profit, but the position size will be less than with the four pip stop loss.

Assume the trader has a $10,000 account and is ready to risk 0.5 percent of it with each deal. That implies they may lose $50 on each deal. They are taking a four-pip risk. Each normal lot ($100,000) represents a profit or loss of $10 per pip. Because the trader is taking a four-pip risk, they can trade 1.25 standard lots ($50 / (4 pips x $10)). They will lose $50 if they lose four pips on 1.25 standard lots, which is their maximum risk per transaction. Their profit is doubled, so they will receive $100 if they make eight pips.

The account has $10,000 in it, but the trader is employing a position size of $100,000. This is a ten-to-one leverage.

Finding profitable trades, on the other hand, is difficult, and even with a 0.5 percent account risk every transaction, losses can quickly pile if the trader has a good approach.

When Should You Scalp and When Should You Not Scalp?

Remember that scalping is a fast-paced trading style that necessitates a large amount of liquidity to enable swift deal execution. Only trade the main currencies when liquidity is strong and volume is high, such as when both London and New York are open for business. The unique component of forex trading is that individual investors may compete with huge hedge funds and banks—all they need to do is open the appropriate account.

If you are unable to concentrate for any reason, do not scalp. Late nights, illness symptoms, and other distractions may frequently knock you off your game. If you experience a streak of losses, stop trading and take some time to recover. Do not try to exact vengeance on the market. Scalping may be both enjoyable and hard, but it can also be frustrating and exhausting. You must be confident in your ability to engage in high-speed trading. Scalping will teach you a lot, and if you slow down, you may discover that you can become a day trader or a swing trader as a result of the confidence and practise you gain through scalping. But keep in mind that scalping is not for everyone.

Always maintain a record of your transactions. Record your trades using screen capture and then print them off for your diary. It will educate you a lot about trading as well as about yourself as a trader.

Particular Considerations for Scalping Forex

Forex scalpers must have a trading account with tight spreads, minimal commissions, and the capacity to place orders at any price. All of these features are usually only available in ECN forex accounts.

ECN forex accounts enable traders to operate as market makers, buying at the bid price and selling at the offer price. Retail consumers must purchase at the offer and sell at the bid in most forex trading accounts. Scalping is also discouraged or prohibited in most FX accounts.

If the spread or costs are too large, or the price at which a trader may trade is too limited, the forex scalper's prospects of success are considerably reduced.

The forex market is huge and liquid; technical analysis is regarded to be a feasible method for trading in this market. Scalping is also seen to be an effective approach for retail forex traders. It is crucial to remember, however, that the forex scalper often demands a greater deposit in order to manage the level of leverage required to make the short and tiny transactions profitable.

Scalping is an extremely fast-paced activity. Scalping may be for you if you enjoy activity and want to focus on one- or two-minute charts. Scalping may be for you if you have the temperament to respond rapidly and have no qualms about incurring small losses of two or three pips.

However, if you want to study and think over every move you make, scalp trading may not be for you.

Source: Investopedia

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Reviewed by Arpita Singh

Arpita SinghArpita Singh is the main writer at ForexBroker.ae. As a senior investment professional with 10+ years of experience working at top-tier Private Equity and Sovereign Wealth Fund; she is also responsible for fact-checking concepts, reviews, and related details about brokers and exchanges listed on this website. Full Bio.