Forex Scalping - A guide to scalping forex
If you’re already interested in forex trading, then you may have come across the term ‘scalping’.
It is similar to day trading in the sense that you are looking to make short-term profits throughout a trading session, but it takes place in a much faster and smaller environment.
What is Forex scaling? Forex scalping is perhaps the riskiest trading strategy you can take up. Many avoid it and prefer to trade long-term.
Some believe that due to the fast-paced nature of it, it can easily become gambling.
That said, it doesn’t mean you should 100% say no to it as your trading strategy of choice. When done simply and efficiently, forex scalping can be highly profitable.
Before you think of scalping, we should explain what it is exactly.
What is Forex scalping?
Forex Scalping is where a trader attempts to make numerous small trades to make many small profits, usually around 10 pips or so for each trade.
Over time, these small gains amount to a large sum of money.
To effectively scalp, you should trade instruments with the lowest spreads as every single pip counts.
This is vital because scalpers will likely have to take into consideration different fees they may have to pay for each trade, though this will depend on the broker you use. Ideally, you do not want to pay any kind of fees.
Perhaps the most famous scalper of all time is Paul Rotter who during the height of his scalping career supposedly made between $65 to $78 million a year over the course of 10 years.
While this is an ungodly amount of money, it should be mentioned that one bad trade can wipe out the value of several others.
On top of that, if you are too fast, sometimes you may open and close a trade at the same price, closing with zero profit.
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The Forex scalping Necessities
Forex Scalping requires a lot of things to be right. If you can’t get them all, you can’t be completely sure your strategy will work.
Scalping is perhaps the most demanding of all forex trading strategies. Without the right things in place, it’s like skiing without ski equipment; you need a lot to be fully-equipped and ready.
The Right Mindset
Scalpers need to be able to take a lot of stress and be very disciplined.
If you are not used to this trading environment, you may be better suited to swing or day trading instead where things take place at a slower pace.
It is like day trading in that you need to sit in front of your screen for long periods of the day, but different in that you need to be extremely well-focused. You need very fast reactions.
You also need to be very decisive and possess the ability to set goals very fast. You should be able to work out when to get in and out of a trade very quickly.
Scalpers also need to be prepared to get out of bad trades fast too.
If they have misinterpreted the direction the market is heading, their trade will start to become a loss. They need to be fast and act without emotion to accept the loss and get out.
The moment they stop following their strategy, they are risking a loss because they are not prepared for such environments. It is not part of their strategy.
If you lack patience and feel that you need to see the money constantly flowing in, then you have the right mindset to scalp the forex market.
A super-fast broker
As we mentioned earlier, you need to have lightning fast reactions and every little pip counts when scalping forex.
That means that the broker you choose must be able to execute the trades you wish to perform as quickly as you want.
Look for ECN, STP or DMA access as these types of brokers will give you greater access to the market, trading as close as possible to real market prices.
Market makers are not advised because prices fluctuate less. Forex scalpers thrive on volatility.
The broker you’re looking at may have specific account types that are ideal for scalping. Be sure to check them out and look at the reviews of their service.
Bear in mind, some brokers do not allow forex scalping and you need to first be sure you can forex scalp with them before signing up!
A super-fast platform
Your platform should also be able to keep up with your orders, or at least get as close as possible to them.
Fill or kill orders are a way to get the exact price you want. What they do is either place the exact order or, if they can’t, cancel the order instead.
Key things a forex scalping strategy needs
The number 1 thing forex scalpers need is volatility. Big movements in price, whether bull markets or bear markets.
Environments where there are explosions in price, short pauses, and then more explosions, are the best.
If the market is not volatile, it may be best to skip scalping, try a different trading strategy or just don’t make any trades until the right conditions emerge.
Great times to find volatility are when certain markets overlap, such as when the London market is open at the same time as the Tokyo or New York market.
You should also be able to identify trends and use them to your advantage. Whatever strategy you choose, you will likely need to spot key points where you can enter and exit the market.
Forex scalpers also use charts, ranging from one minute to an hour.
Charts bigger than an hour will not be useful as you need to focus on very small price movements, usually around 10 or so pips per transaction.
It is advised though that before starting a trading session, scalpers should look at daily charts to spot the highs and lows the currency pair may reach in that day.
Some forex scalpers avoid scalping up to 30 minutes before big news events. Others try to scalp it directly. This will rely on if you use fundamental or technical analysis or a mix of the two.
Top five simple and profitable forex scalping strategies
Many of the best forex scalping strategies use indicators to tell traders when to trade. As a forex scalper, you may use a combination of the strategies mentioned.
Ideally, whatever strategy you decide to use, look for confluence, which is where you get at least two signs that you have found an opportunity to buy or sell.
By using at least two signs, you are more likely to get results. That said, finding confluence is very subjective and depends on what indicators you are using.
Let’s look at the simplest and most profitable forex scalping strategies.
1. Exponential Moving Averages
This strategy relies solely on using exponential moving average (EMA) indicators.
EMAs are very easy to use and basically show the underlying trend behind a forex pair by showcasing the average price over a period of time, instead of the current price.
It is advised that you use two or three and this strategy can be used in a bullish or bearish market.
When the current price is above the EMA, it can be seen as a signal to sell; when the price is below the ema, it can be a signal to buy.
By using more than one EMA, we can be more accurate when identifying crucial buy or sell points.
This is particularly true when a slower EMA rise above or dip below faster EMAs. For example, if the 10 EMA meets the 20 EMA.
In a bearish market, when the price reaches the lowest EMA, it is a sign to sell.
The opposite is true in a bullish market. When the price meets the highest EMA, it can be a sign to buy.
Set a stop-loss a bit before or after the meeting point. This will prevent you from getting stopped out early, just in case the price dips below before rising. Give the Stop-loss some space from the lowest price.
By looking for EMA meeting points in conjunction with the current price, we can more certain or buying and selling points.
A crucial thing to point out about exponential moving averages it that what they show you is past prices. They always lag a bit behind the real trend. Because of this, they cannot always be relied upon.
2. Volume and price action
This strategy uses volume indicators to look for price action. It is based on the theory that changes in volume are usually followed by price action.
In a sense, volume is your signal and the price action is your confirmation.
When volume is low, it can be a sign that a trend is dying and may reverse, or that it is taking a break before continuing.
Typically, low volume is followed by high volume and then price action in the short term (and not necessarily in the long term), which makes it highly useful for forex scalpers.
To use volume, forex scalpers need to be patient during a ranging market, spot volume spike alongside price action and buy before prices go up. Once they are high, sell.
Be sure to wait for confirmation of a bullish trend before relying on volume!
When it comes to trading volume in the forex market, traders need to be careful where they are getting the information from. Most brokers who offer this feature will likely just offer the volume they see from trades they are fulfilling.
This is because the forex market is decentralised and because of that it is almost impossible to gain a complete picture of where money is moving.
One last thing to remember about trading volume is to never trade one movement! Look for a series to be sure the environment is good to trade.
3. Using Stochastics and a trend line
This strategy uses the stochastics indicator in conjunction with a trend line.
Stochastics measures if something is overbought underbought. If it is above 80 it is classed as oversold and below 20 is underbought.
Ideally, to implement this strategy, you need to have an uptrend or a downtrend as it will be hard to use this strategy in a ranging market.
On your platform, draw your uptrend using the trendline tool. What you are looking for is where the trend line is met or crossed over. This acts as a signal to potentially buy or sell.
After this, you need to look for either an overbought or underbought condition in the trend. Then, use the stochastic as a guide to enter or exit on pullbacks.
You can tweak this strategy to use a channel pattern instead of a trend line to more clearly mark support and resistance levels.
This is a good strategy because you have two conditions met. Trading on a trend is one and the overbought, underbought condition from the stochastics acts as the second.
4. Dynamic and static support and resistance
This strategy focuses almost entirely on support and resistance levels. As a rule, three or more points can indicate a line of support or resistance.
Static support and resistance are the levels from the beginning of the day, the highest and lowest points. This must be identified when you start trading
Dynamic support and resistance are always changing depending on market fluctuations and are far more subjective. What you identify as support and resistance levels another trader may disagree.
Look for areas where static and dynamic support meet. These can be your buy and sell points.
This strategy is very simple and can be used in conjunction with other indicators to gain further confirmation of buying and selling points.
5. Bollinger Bands
Bollinger bands are used to see volatility. The further they are from the centre, the more volatile they are.
They measure the highest and lowest points of an instrument and can be great for knowing when to avoid the market if it is ranging. In which case, the bands will be close to each other.
This strategy is very simple. When prices reach the upper band, go short and when prices reach the lower band, go long.
Despite the above, this strategy can also be used in a ranging environment as well as a volatile one, though it can be more difficult.
To make the most of this strategy follow the 10-pip rule above and below so you don’t get stopped out.
Don’t complicate things!
Whatever strategy you decide to use, keep it simple. After all, that’s the reason why you are reading this article.
Simplicity in trading forex is underrated and will always earn you far more than a complicated strategy.
This is because simple strategies are far easier to learn and repeat. The more parts there are to your strategy, the more things there are that can go wrong.
Simple strategies are also easier to remove emotion from your trades as well, reducing the pressure on you to succeed.
If you decide to use one or two of the strategies we have mentioned, don’t think of adding more indicators. Learn what works best for you and stick to it.
Backtest the strategy you plan to use!
Do not automatically trust the strategy you come across. Always test it, even the ones we have told you about should be backtested first.
While the strategies we have listed are effective, they still might not work for you.
The best place to do some backtesting it with a demo account. That said, you need to be careful with demo accounts as the market conditions they offer are never real.
In the real world, market execution is never so fast and immediate. Prices change fast and there is always slippage.
If you test a strategy in a demo account and think it will work well in a real environment, then proceed to test it there as well. Start off small and don’t risk too much until you are confident the strategy will work.
You may find that some of the strategies we have offered will not work for you because they don’t fit in with your trading style or temperament.
How to start forex scalping
There are two ways to start scalping, depending on your expertise. Your two ways are:
- Open an account. You can open an account with eToro quickly and easily
- Practise trading on a demo account. Test your scalping trading strategies in a risk-free environment with an eToro demo account
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- Forex scalping is where you make many small trades. Over time, small gains amount to a large profit.
- Make sure you have all the scalping necessities. Those are: a fast broker; fast platform; the right mindset.
- The best strategies look for confluence. They need at least two or more confirmations to buy or sell.
- Keep your forex scalping strategy simple! It will make it easier to learn and repeat.
Forex Scalping is an extremely effective trading style. Though it is important to note that forex trading scalping is hard work. In the end, your forex trading strategy has to match your trading style and abilities.
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Rememer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.