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Forex Scalping

Scalping is a term used in trading which is characterized by relatively short time trading periods between the opening and closing of a trade. It is a quick trading strategy in which a trader makes a very small profit from each trade. The scalper opens and closes many positions during the day manually. The name, “Scalping” is derived from the way its goals are achieved. Hence, the word “scalp” literally means trying to generate lots of small profits from a big number of trades throughout the day. Scalping is as time-consuming and profitable as you want.

What is Scalping in Forex?

Scalping is a short-term strategy in which a trader aims to generate profit out of tiny price movements. Scalping trades are often only held between a few seconds to a few minutes at the most. The main goal of a forex scalper is to earn small amounts as many times as possible in a single day during the busiest times. Traders basically buy or sell a currency pair and hold and quickly grab a few pips between 5-10 pips by holding the positions for a period of a few seconds or minutes. They then repeat this process throughout the day to gain or make a more significant profit from each position by capitalizing on price fluctuations. with scalping, traders can grab up to hundred trades in the busiest hours of the day seeking small profits. Leveraging trading is one of the best forex scalping strategies involved since it allows for larger position sizes. Using leverage in forex enables traders to borrow capital from a broker to get more exposed to the forex market, and only a small percentage of the full asset value is deposited. For instance, a seven pip profit in the GBP/USD on a $10,000 position (mini lot) is $7, while on a standard lot position ($100,000) that seven pip movement equates to $70. While forex scalping magnifies profits, it also magnifies losses if the market moves in an unfavorable direction to the bet. Hence, forex scalpers are required to regularly keep an eye on the market for any changes.

This chart shows the zone for taking action on trade positions; a scalper must identify a trend before entering each position. 

Forex scalping strategies can be manual or automated. A manual system involves a trader sitting at the computer screen, looking for signals, and interpreting whether to buy or sell. In an automated trading system, programs are used to tell the trading software when to buy and sell based on inputted parameters.

Things to Consider Before Scalping in Forex

If you decide to adopt the scalping strategy in trading CFD, here are some things you need to put into consideration

1. Spreads and liquidity of trades: Trade only the most liquid pairs with the tightest spreads since you will be entering multiple trades. For example, if you decide to enter a long position on EUR/USD, with a bid-ask spread of 3 pips, your trade position instantly begins with an unrealized loss of 3 pips. Currency pairs such as the EUR/USD, USD/CHF, GBP/USD, and USD/JPY offer the tightest spreads since they tend to have the highest trading volume.

2. Closing of positions: All positions are closed at the end of the trading day.

3. Suitable Trade time: Trade only during the busiest times of the day, for example, you can trade during the most liquid times such as 7 am – 9 am (2:00 am to 4:00 am EST) and from 1 pm to 5 pm (8:00 am to 12:00 noon EST)

4. Maximum attention needed: Because scalpers have to be glued to the charts, it is best suited for those who can spend several hours of undivided attention on their trading. It requires focus and fast thinking to be successful. Not all traders can handle such quick and demanding trading.

Forex Scalping Strategies

There are various forex scalping trading strategies that a trader can employ

1. Trend trading: This is one of the easiest forex scalping trading strategies for forex beginners. It means entering in the direction of the trend or trading with the trend. When looking for a trend, it’s necessary to recognize that markets do not tend to move in a straight line. As Market prices move up or down in a trend, a trader attempts to capture a profit if the trend continues.

2. Countertrend trading: This is the opposite of trend trading and is more difficult for a scalper. In this type of scalping, a trader attempts to quickly make a profit by entering multiple positions in the direction of a long retracement (pullback) while anticipating an overall trend reversal. It involves capitalizing on the frequency at which market trends tend to break down or reverse a trend. If the market however moves against you by resuming its actual trend, you must admit that your analysis is wrong and exit the trade

3. Forex price action scalping: this trading technique involves the use of technical analysis by focusing on price only, without an indicator. Price action strategy is achieved by observing candlestick charts, using support and resistance levels and trendlines to interpret the market., traders can then decide by analyzing several factors that influence the price of foreign currencies such as economic growth, inflation, supply and demand, interest rates, trade status, and account balance. Based on the informed decisions and trend continuations, a trader will scalp a trade if the goal has a suitable risk-reward ratio.

4. Forex scalping signals trading: trading signals are produced by software or technical indicators, to spot potential entry and exit opportunities for a trade particularly in volatile and less liquid markets. Forex scalping signals are quite important due to the speed of the trade. Signal trading can be used for both long-term and short-term trades.

5. Range strategies: this is a strategy in which a trader identifies support and resistance areas and then attempts to buy near support and sell near resistance. Hence, the trader profits from oscillating price action.

Indicators for Forex Scalping

With the use of the best forex scalping indicators including Bollinger Bands, stochastic oscillators, and Keltner channels, a scalper will be able to identify patterns and trends on price charts as they monitor the online forex market.

1. Bollinger Band scalping: A Bollinger Band chart shows the volatility of the forex market, which is helpful for scalpers as volatile trades tend to be so rapid, usually within a maximum of 5 minutes for each position. It is particularly a useful forex scalping
indicator for currency pairs with low spreads in the foreign exchange market, as these are the least volatile and if trades are executed correctly, it can yield the forex scalper multiple profits at once. Examples of such pairs include a mix of major currency pairs such as the EUR/USD, GBP/USD, and minor currency pairs such as EUR/JPY.

2. Moving averages for scalping forex: A moving average chart is one of the most often used forex scalping indicators by professional scalpers to determine the price movement through its ability to spot changes more rapidly than others. There are several moving average lines on a typical forex chart. The simple moving average (SMA) and the exponential moving average (EMA) are the two most commonly used forex indicators for scalping which are often used to represent short-term variance in a currency’s price trends.

3. Forex relative strength index scalping: The RSI is a momentum oscillator that aims at predicting the future direction of the FX market over some time. It can be useful for short-term traders, such as scalpers and day traders by shortening the default settings of the RSI to monitor just minutes at a time, to identify the best entry and exit points. Measuring momentum is useful within the FX market for traders to find an appropriate strategy for the current environment.

A Typical Example of Scalping

If a forex scalper decides to trade the EUR/USD currency pair using a trend trading strategy, they tend to identify the recent trend, wait for a retracement/pullback, and then buy (if an uptrend is identified) when the price starts moving back in the trending direction. Depending on the volatility of the market, the trader typically risks four pips in scalping and takes a profit at eight pips. The reward is twice the risk, which is a good risk/reward. If volatility is higher, for instance in the XAUUSD scalping trade, the trader will risk more pips and try to make a relatively larger profit, but the position size will be smaller than that used in the four pip stop loss trade.

Check out how to calculate your pips

How to Scalp Forex

1. Open an account: You can firstly access our demo account where you can practice with $10,000 worth of virtual funds. When you have mastered your trading style, you can start trading and earning on a live account.

2: Study our trading costs: We offer the best competitive spreads and low margin rates on major, minor, and exotic crosses.

3. Choose your forex pair: We offer over 200 currency pairs to trade on. However, when scalping, always focus on one or two pairs only

4. Identify the trend and decide if you want to buy or sell.

5. Enter your trades and always use stop-loss orders: In scalping, risk-management controls are very important. A 10 pip takes profits and 5 pips stop loss from the entry point on each trade is recommended.

6. Concentrate on your trades: Scalping requires concentration, patience, and analytical skills which allow scalpers to make quick decisions with the hope of making a profit.

Is Forex Scalping Profitable?

Forex margins used in opening new positions can help to boost profits in scalping if those positions are successful, however, these margins can also magnify losses if the trades fall through. Hence it is important to always manage their risks and losses by putting into place stop-loss orders. In scalping, stop loss allows traders to set a price at which their positions will automatically close out if the market goes in the opposite and unfavorable direction. Stop-loss orders prevent the scalper from holding onto a sinking position given that a scalp position only lasts a few minutes.

Similarly, Leverage and bigger position sizes in scalping can also pose a risk. For instance, if a trader has $1,000 in their account and uses a $10,000 position size. This will equate to 10:1 leverage. It will be profitable for a trader who risks five pips on each trade and successfully gets out when they have earned 10 pip profits. However, with a higher amount of leverage and margin, it will be quite risky if a trade goes against you, especially below 5 pips loss. If a trader fails to immediately get out of a trade at a five pip loss in volatile trade, it might result in the trader getting out at bigger losses such as 20 pips loss thereby losing four times as much as expected in multiple scalping trades

Pros of Forex Scalping

A scalper’s personality and concentration are vital to the success of scalping trades since it enables them to spot market changes quickly and close their position to avoid losses. Scalping strategy favors fast and experienced traders who are accustomed to swift trading and excitement. It is also a safe strategy for those who understand the charts and can focus on them for several hours at a time

Cons of Forex Scalping

Like every other trading strategy, scalping is not without risks. While forex higher margins and leverage help to magnify profits, they also magnify losses if trades are not executed properly. The market is volatile and can easily change direction, thereby making a trader lose all their scalping positions. Hence, a scalper is required to develop a strategy or style by working on the best ways to minimize losses. 

In addition, scalping is quite demanding. For you to be successful with scalping, you must be able to commit several hours of undivided attention to your charts and also create time to analyze the overall picture of the market. A scalping strategy is not recommended for beginner traders, since it requires concentration, experience, and knowledge of the forex market. The majority of experienced forex traders adopt the scalping strategy in carrying out swift transactions. 

Longer positions are not suitable for scalping since they tend to pose more risks. Therefore, most scalpers usually trade pairs with tighter currency spreads to minimize risk.