The Complete Guide to Forex Scalping
In this article, we will dissect Forex scalping. So, in essence, this will be a Forex scalping guide.
What is Forex Scalping?
A Forex scalping strategy is applicable when a trader has a very short hold times and expects to make only 10-30 pips on most trades. Because it is a very precise way of trading, traders could have high win rates of 80% and higher! Also, because the hold times are often 10 minutes — maybe up to an hour or an hour and a half, traders who have full-time jobs and are trying to trade the Forex for additional income or retirement savings can fit this style into their busy schedules easier than any other form of trading.
The most important concept in ANY form of trading is to keep losses small and have bigger winning trades than your losses on average. But with Scalp trading, due to its higher winning percentage when done correctly, a trader can get away with winning trades the same size as losses. So say your stops are 10 pips, you could take 10 pip wins. The markets during the UK, Europe, and U.S. sessions move so much in most currencies, that finding a 10 pip move in 10 – 60 minutes is not too difficult.
It’s also not unreasonable to have 20-33% of your winning trades be for 20+ pips.This makes this method not only profitable, but also provides traders with a less stressful way of trading because the trader knows rather fast if the trade is likely to work and if not, they will exit with a 2-5 pip loss instead of 10, or often times a 2-5 pip win as the trade stalled out. Remember, it’s always better to take a small win than to let the trade go negative!
How is Scalping Done?
Scalping can be based on many factors; the news as key political speeches are made or recently released statistics (think GDP, unemployment, trade balance reports, interest rates and inflation levels). All can have a major impact on a country’s economy, and consequently, its currency. Essentially traders are speculating on how foreign currency might react, even if it is only for a short while.
Just like any Forex trading system, there are many different strategies that can be utilized. Based on our research there are only few that should be utilized in your strategy.
There are many statistical tools that can be used to know which currencies are most likely to go up and to go down. It isn’t uncommon to use scalping indicators in many different combinations to identify market reversals and decide whether to go short or long when the price action is stale (ie. sideways moving market.)
Methods used include Bollinger bands with RSI and specific candlestick patterns (think spinning tops and inverted hammers), a collection of time charts with a 200 EMA and pivot points to identify levels of support and resistance.
For traders who are using just regular charts, you can look at the currency pair’s daily chart to see if the trend is up. Then FOCUS on buying that currency when Scalping. If the trend is going down, focus on selling.
Once you know the longer term trend, look at today’s trend. Bring up a 60-minute chart and put on 20-period simple moving average. If the currency pair’s daily trend is up and it’s above the day’s moving average, you want to look for buys. If the daily trend is down and today’s price is under the hourly moving average, you want to look for sells.
Exact Entry and Exit Method
The next scalping strategy is the Exact Entry and Exit method. Once you’re trading in the direction of the longer term trend and use the filter of the hourly MA, then this is the easiest part. Wait for a spike move in the direction of the trend. Then on next pullback draw a trendline over/under the bars highs and/or lows. If the trend is up and the spike is up, wait for a down move of at least 15 minutes and draw a trendline over the highs. When price breaks out,your buy and stop should be 2-5 pips under the swing low. The opposite is true for for sells, wait for a spike move down, then a pullback up move. Draw a trendline under the lows and when broken, enter.
Fibonacci Retracements Method
Another Forex scalping strategy is to draw Fibonacci retracements and profit targets on a chart. Use the trendline approach when support/resistance is hit and enter upon trendline breakout. Use 50 tick charts and use 2.2 Keltner channels. If the trend is up, as described above, buy the lower band. If the trend is down then sell the upper band. You can exit scalp trade at other end of the bands or trail stop up.
When is Scalping a Good Option?
Most traders tend to be either scalpers or day traders or position traders – sticking to an area of expertise that suits their personality, lifestyle or, simply, what works for them. Forex Scalping can be seen as an ‘individual’s trading style’ or alternatively, it can be very useful for markets that move sideways. When a market is moving sideways, it is hard to place trades over a longer time frame as the direction or the price is more obscure. When the Forex market is choppy – Scalp trading can prove to be the perfect tool for putting pips in your account during these tricky periods, taking small profits here and there (or leveraging to make big profits), when you see the right signals.
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