Comprehensive Guide to Forex Scalping

Even if you’re a total forex trading novice, at some point you have to have come across the word “scalping”.

This article will give you all the fundamentals behind the forex scalping method, and will show you a range of strategies and techniques.

Find out what forex scalping is, how to scalp in forex, and why you should consider using scalping techniques.

What's Scalping for Forex ?

Scalping is a phrase used in the investment world to describe routinely “skimming” off small profits, by going in and out of positions many times a day.

In the forex market, scalping involves trading currencies based on a collection of real time data, but without staying too long in one market position.

The object of scalping is to make a profit by buying or selling currencies and holding the place for a very short time, for a small profit, and then closing it.

Most trades are positioned throughout the day of trading using a method that is usually based on a collection of signals extracted from the charting tools based on technical analysis.

The charting consists of a multitude of signals, which determine a decision to buy or sell while pointing in the same direction. The main aim for forex scalpers is to catch very small amounts of pips as many times as they can over the busiest times of the day.

Since scalpers have to be practically glued to the charts, it’s better suited for those who can spend multiple hours of undivided attention on their trade. For it to be effective, it needs intense concentration and quick thinking.

Why do Forex Traders Scalp ?

Forex is, as we all know, the most volatile and liquid market with some currency pairs changing by up to 10–20 pips in one day.

Forex scalpers aim to take as many profits as possible out of these swings in foreign exchange rates by opening and closing trade with only a few pips. In other words, scalping the forex market is simply taking advantage of the small price shifts of an asset, typically done over a very short time span.

For many traders, scalping is quite a common method, as it generates multiple trading opportunities within the same day. The success is primarily due to the fact that it has very high chances of having an entry signal.

A trader does not normally expect to gain more than 10 pips during the scalping process, or lose more than 7 pips per trade, including spread. However, scalping is typically done with large volumes in order for those 10 pip gains to add up to a significant profit. This means that many scalpers do not obey the traditional 2 per cent risk management guideline, but instead, trade much higher volumes during their forex scalping sessions.

Traders stand to benefit from a safe, predictable income, by being compliant with this method.

There are two separate scalping methods: manual, and automatic. Scalpers need to sit in front of a computer in the manual system, so they can track market dynamics to select their positions.

On the other hand, a scalper can ‘teach’ a particular strategy to a computer program with the automated system, so that it conducts trades on behalf of the trader.

How Does Forex Scalping Work ?

Scalping is no different from day trading in which a trader would open a position and then close it again during the current trading day, never bringing a position into another trading time or holding a position overnight.

However, while a day trader may try to take up a position once or twice, or even a few times a day, scalping is much more frantic, and during a session may trade several times. Although a day trader can trade off 5- and 30-minute charts, scalpers often trade off tick charts and 1-minute charts.

Some scalpers especially like to try to capture the high-velocity moves that occur around the time of release of economic data and news. Such news involves reporting the job statistics or GDP figures — whichever is high on the economic agenda of the trader.

Scalpers want to try to scalp between five and ten pips out of every trade they do and replicate this cycle over and over during the day.

Is Scalping Suitable for any Forex Trader ?

Scalping demands that the trader pay much more attention, compared to other types of trading.

A typical scalper can open and close tens, and in some cases, on an ordinary trading day, more than a hundred positions, and since none of the positions should be permitted to suffer great losses (so that they can protect their bottom line), the scalper cannot afford to be cautious about some, and reckless about other of his positions.

At first glance, it can seem a difficult challenge, but scalping can be an engaging, even humorous, style of trading until the trader becomes relaxed with his activities and habits. Still, it’s obvious that the good forex scalper requires attentiveness and strong skills to focus.

One need not be born equipped with these talents, but if a trader has any serious intention of being a real scalper, practise and dedication to achieving these talents are indispensable.

The returns produced in each position opened by the scalper are typically small, but when gains from each closed small position are added, great profits are made.

Scalpers don’t want to take big risks, which means they’re willing to sacrifice big profits in exchange for the protection of small, but regular gains.

How to Develop a Successful Strategy on Forex Scalping

When looking to develop a profitable forex scalping strategy, traders need to concentrate on these main aspects.

Time

The first thing to remember is that it takes time to build a successful forex scalping strategy. Unlike other types of trading, you need to be ready to trade with forex scalping whenever the market offers a chance.

Not many traders have the time needed to track the charts on an ongoing basis.

One way to tackle this problem is to concentrate on one pair of currencies and track the periods when volatility is rising. For instance, volatility usually increases when two trading sessions overlap. That brings increased market liquidity.

When one trading session ends, the other trading session begins. Traders therefore prefer either to close off or open positions, depending on whether the trading session starts or finishes.

Risk Management

Risk management is another crucial feature of forex scalping. Although forex scalping’s basic aim is to make money by taking advantage of the uncertainty, there’s a good chance your trade will easily slip into a loss.

It’s critical that you have good risk management in your forex scalping strategy. This will ensure you are not too caught up in the day-to-day market fluctuations, but instead focus on how much money you are likely to lose.

Market Volatility

Market volatility is vitally important. Clearly, if the markets sell flat, you should expect to trade, and make some money.

There is room for prices to show significant intra-day fluctuations when there is greater volatility in the markets.

This helps traders to catch these fast price swings and pinch a few pips of income from the markets.

Self-control

It is also important to have self-control when scalping the forex markets. There are lots of articles on the psychology of trading, which can throw a light on the important role discipline plays in forex trading.

With scalping one can easily give in to your emotions because of the amount of action that takes place. This can cause the trader to take on undue risk that could potentially result in losses that could otherwise have been avoided.

Traders ought to train regularly to learn how to be disciplined so as to make it second nature. Forex scalping discipline can also hold you back from over-trading. Just because you see a promising currency pair, shouldn’t be the excuse for you to dive in with your forex scalping strategy.

Broker Policies

A good forex scalping strategy must also concentrate on the terms of trade for the broker. In the forex markets, volatility usually rises during main news releases. That can lead to widening market spreads.

When spreads widen, there’s a fair chance your stop loss or the amount of income you take will be hit unexpectedly. Also, the spreads can rely not only on news releases, but also on the type of instrument you are trading.

Hence, when developing a successful forex scalping strategy, traders need to pay attention to those factors.

Most importantly, you should comply with the terms and conditions of your forex broker. Not every forex broker will enable scalping on their platform. And when you’re dealing with pending orders, there’s also a certain cap to the current price at which to place those pending orders. All of these variables end up playing an important role in the success of your forex scalping strategy.

How do Scalpers Make Money from Forex ?

We have already explained that scalping is about making small profits over a long period of time, which can reach large amounts when combined. Yet scalping, of course, is not about blindly entering the market and buying or selling, while hoping for luck to be on hand. Instead, a successful scalper is very methodical with regard to both decisions and market expectations.

Below are some of the tips that would help you in your journey towards successful forex scalping.

Take Advantage of Fast Price moves

Many scalpers tend to concentrate on the sharp movements that often occur in the currency market. In this case, the goal is to take advantage of sudden shifts in market liquidity for fast profits later.

The aim is to recognise cases in which temporary liquidity shortages create imbalances which offer opportunities for trade.

Leverage

Scalping requires the compounding of small gains over a long period of time to produce large amounts. But sometimes the returns from scalping are so small that, due to the small size of the actual movements in the currency market, even when averaged over weeks or months, the returns are negligible for the amount of effort involved.

Virtually all forex traders make use of a certain amount of leverage while scalping to resolve the problem. The correct amount of leverage for a scalper is a topic of debate among traders. Yet the best advice any beginning scalper should heed amid the controversy, is to keep the leverage as low as possible for at least the first two or three months of trading.

Scalping Strategies

Because one big mistake can wipe out the profits of hundreds of trades taken in a day, the scalper needs to be very vigilant in evaluating the market and cautious in applying his analysis and implementing his strategies.

The position of fundamental analysis in scalping is generally very small, which is why some traders combine scalping with another strategy, such as range-trading or trend-following, and only vary in terms of their exposure times from the real practitioners of these strategies.

What are the Best Currencies for Scalping ?

A lot of traders use scalping techniques in trading. Scalping can be used as the key technique of profit generation, as well as an auxiliary technique for entering small stop-loss trades.

Nevertheless, when used on different trading instruments, the scalping shows a different performance. A currency pair’s volatility can directly influence the trade risks, and the scale of a profit and loss. You should review the characteristics of a currency pair before applying scalping methods to show all its pros and cons.

Scalping the GBP/USD, EUR/USD

GBP/USD and EUR/USD currency pairs enjoy the widest popularity among traders. This is demonstrated by the high liquidity and small spreads of those currencies. GBP/USD and EUR/USD represent the most common and strong currencies in the world that allow traders to use different forex strategies in trading. These currency pairs are normally picked by beginner scalpers. The so-called market noise for currency pairs GBP/USD and EUR/USD averages 20-30 pips allowing a relatively good profit to be received even in poor movements.

Scalping the AUD/USD and USD/CAD

Putting currency pairs AUD/USD and USD/CAD in one row would not be completely right as USD/CAD approaches for the flat forex strategy and AUD/USD has a pronounced trend structure. However, in view of the fact that these currency pairs have the counter-trend fluctuations in quotations, we list them together. Market noise on AUD/USD and USD/CAD pairs averages 20–40 pips. Scalping the AUD/USD and USD/CAD at night or in the evening is recommended. That is why professionals always trade those currency pairs.

Scalping the Japanese Yen

Another currency is the Japanese Yen, commonly used in the forex market. EUR/JPY, USD/JPY and GBP/JPY are the most common pairs to sell. There is one aspect which is very important. All other pairs are cross-rates, except for USD/JPY, given the increasing uncertainty and strong price shifts. Because of the high volatility, many times more transactions can be made by the scalper, which increases profitability.

Choosing a Forex Trading Platform

One very important thing for you to follow a forex scalping trading strategy is that you can access a trading platform that is user-friendly and which allows you to place several trades quickly and with the least effort.

It is with that in mind that we would recommend that you check the trading platforms available at multiple different forex brokers when you first start trading online or even in the mobile trading area.

You will find that the vast majority of forex brokers will require you to open a demo trading account, allowing you to have several trading sessions using the platforms provided by those brokers, but using demo trading credits rather than your own funds.

By trying out several different trading systems, you’ll soon be able to make a judgement call on which platform you consider convenient to use and one you’d like to use for real money while trading.

Is Forex Scalping for You ?

Forex scalping may not be an effective strategy for every trader. The returns produced in each position opened by the scalper are typically small, but when gains from each closed small position are added up, great profits can be made.

Scalpers don’t want to take big risks, which means they’re willing to sacrifice big profits in exchange for the protection of small, but regular gains. The scalper therefore needs to be a patient, conscientious person who is able to wait, as the fruits of his labours turn over time into great profits.

An impulsive, impatient character who seeks immediate gratification with each consecutive trade and wants to “make it big” is unlikely to accomplish anything but disappointment by using this technique.

Scalping Strategies and Techniques

There are ways to make money with forex scalping.

A good scalper tries to figure out support and resistance, price trends and signals from technical indicators. The scalper will concentrate on the specific time frame interval tables, such as the 1-minute and 5-minute charts. Scalpers use momentum indicators, such as RSI, moving average convergence divergence (MACD) oscillator, and stochastic oscillator.

The most common technique of scalping is simply to use the time of the market and decide where and when to do trades. Another strategy is to provide a clear target amount of profit per transaction which should be proportional to the price.

Traders should watch stocks that break out to new daily highs or lows and use levels to capture full profits. Finally, during market volatility, some traders monitor the news and trade based on current or future events.

Getting Started with Scalping Forex

Scalping is one of the most effective strategies a trader can use when it comes to trading foreign currencies on the market. Traders can use the following tips to get started and even succeed as forex scalpers.

Using the Charts and Other Analysis for Research

Your path to future success in scalping to a large extent lies in understanding trends and how the market shifts. Depending on the platform you’re using, you’ll find various trend lines showing which currency pairs are most in demand and which ones are generally sloping downwards.

Starting Small

The complexity of forex trading is debatable, which is why starting small and minimising the risk is critical. You can then do bigger and bolder trades with enough experience and practise. However, you shouldn’t be afraid to do baby steps as a beginner.

Forex scalping is not about making measured bets to make any income. Instead, it includes making good decisions where one can gain and accumulating a small profit over time.

Just Trade the Most Liquid Currency Sets

Fundamentally, a currency pair is the estimated price of two currencies against each other. The first quote is known as the base currency, while the second is called the quote currency. Scalping involves considering the short-term benefits, so it’s vital that you know which pairing in a short period of time will theoretically bring in more income.

Trade During the Busiest Time of the Day

Timing is everything in scalping, and this includes the period of time when you will launch your trading session.

The most liquid trading time typically occurs as sessions begin to overlap between 02:00 and 04:00 Eastern Time, as well as between 08:00am and 12 noon Eastern Time, depending on where you live.

While knowing which time is best for trading is definitely helpful, scalpers can still make money during the day’s irregular or directionless trading times, as long as they have the fast wit to get things done.

Practice Risk Management

Every trading strategy involves risk management strategies to be used by traders if they ever feel they are in the wrong place at the wrong moment. This includes setting a stop loss position.

Start with a Demo Account

A demo account that comes with your trading platform is more or less a simulation app. It is especially useful for beginners who have yet to become accustomed to the live trade.

Demo accounts are also helpful to strategy makers as they provide scalpers with the ability to get a sense of the market, practise conducting fast trades and develop their analytical skills map.

If you are searching for a trading platform, pick one that has a trial account so that you can gain some experience without risking any money.

When to Scalp and When Not to Scalp

Scalping is high-speed trading, and therefore needs a lot of liquidity to ensure quick trading.

Trade only the major currencies where the price is strongest, and only when the volume is very high, such as when trading in both London and New York.

The interesting feature of forex trading is that individual investors can compete with major hedge funds and banks. The investors only need to set up the right account.

Do not scalp when, for whatever reason, you feel unfocused. Late evenings, signs of fever, and so on, will always throw you off your game. When you have a string of losses, stop trading and give yourself time to regroup.

Scalping can be fun and rewarding but it can be exhausting and frustrating as well. You have to be confident of having the personality to engage in high-speed trading.

You’ll learn a lot from scalping, and then, by slowing down, you can find that you can even become a day trader or swing trader because of the confidence and experience that scalping can offer you.

But remember, scalping is not for everybody. Always keep a log of your trades. Record the movements you make and go through them once in a while. It’ll teach you a lot about trading, and more about yourself as a trader.

Wrapping Up

Scalping is extremely fast-paced. If you like the action, and you like to concentrate on charts of one or two minutes for long periods, then scalping may be for you.

But if you want to evaluate and think about every decision you make, you may not be ready for scalp trading.

FAQ's

Pip is short for “point factor” and is the smallest leap in exchange rates a currency pair will take. It can add up to using high leverage and doing trades for only a few pips benefit at a time. If their trades are successful and can be replicated several times over the course of the day, scalpers get the best results.

The perfect time to scalp forex is when the market offers you the opportunity to satisfy every single condition of your trade entry. Very simply, this can happen at any time of the day.

Ideally, in order for the market to meet all of the trade entry requirements, it takes some movement before it can hit those requirements and it needs volatility in order to get the movement.

During the New York-London gap, volatility is often present (this means the difference when the London market closes and New York market opens). During the London-Tokyo overlap and Sydney-Tokyo overlap, it is also relatively present.

Some traders prefer to be either scalpers, day traders or place traders, sticking to an area of knowledge that suits their personality or lifestyle.

Scalping can be used as an ‘individual’s type of trading’ or, similarly, it can be very useful for lateral transfer markets. It is difficult to position trades over a longer time period when a market is moving sideways, as the path or price becomes more elusive. When the forex market is choppy, scalp trading will prove to be the perfect method for bringing pips into your account during these tricky times, taking small profits here and there (or exploiting to make big profits), when you see the right signals.

There are several statistical methods for knowing which currencies are most likely to go up and down. In several different types, it is not unusual to use scalping measures to recognise market reversals and determine whether to go short or long when the price action is stagnant.

Yes, scalping can be a great trading technique for the low, retail traders if the money is used properly. It is also a brilliant technique for the inexperienced traders.

Scalping isn’t always an optimal technique for people with day jobs and other hobbies, but can be ideal for people with lots of time on their hands. Instead, more fitting would be longer-term trades with larger profit expectations. Scalping is a hard technique to implement effectively. One of the key reasons for this is that it needs lots of trades over time.

Forex scalpers is 100% legal and is a perfect way to trade, but the big reason that many brokers dislike it is because it upsets their strategy of how they expect the market to run.

If their trades are successful and can be replicated several times over the course of the day, scalpers can get great results. The average value of a pip with one regular lot is around $10. So, the trader will make $50 at a time for every five pips of profit made. This would mean $500 at ten times a day.

The requirements for opening a forex account have gotten easier since the explosion of trading online. Today, you can open a forex account as easily as if you are opening a bank account.

First, you’ll need to find and register with a forex broker. All forex trading has to be done via a broker, who may be a specialised forex broker or the same company you use for stock market investment.

You’ll need to fill out a brief form about your financial knowledge and trading plans. You’ll also need to provide an identification, and the minimum deposit your forex account broker requires.

In order to forecast future movements in exchange rates using past market data, traders need to look for trends and signals. Previous movements of currency prices cause trends to emerge, which can be identified via technical analysis, and if correct, should indicate where the rate is going to next.

It is possible to make a living trading forex.

Studies on day trader performance have shown that most lose money over the long term. Still, some people make a good living trading stocks and have done so successfully for years.

You can make money trading in currency pairs. You decide whether to buy or sell a currency pair depending on how the market is doing at the moment. For example, if you are trading the EUR/USD and you believe the Euro will gain against the US Dollar, you buy. If you believe the Euro will drop in value, you sell.