The Quick Guide to Forex Scalping
Forex scalping is a style of trading where a trader uses very short hold times with the expectation of generating a small amount of profits on very short time frames. Trades are placed on short time frames (scalper’s trades typically only last seconds to minutes) with quick transactions that usually target less than 10 pips per trade. Such quick intra-day trading can be very appealing when compared to long term trading strategies where waiting to profit from a transaction can take days, weeks or even months.
Because it is a very precise way of trading, traders could have high win rates of 80% or higher.
Video: What is Forex Scalping
The most important concept in any form of trading is to keep losses small and have bigger winning trades than your losses on average. With scalping, 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 quickly if the trade is likely to work and if not. Remember, it’s always better to take a small win than to let the trade go negative!
How is Scalping Done?
Scalping is defined by the following traits:
- Short time frames
- Fast execution of trades
- Larger quantity of trades
- Tighter stop loss limits
- Consistent trade sizes
- Higher leverage
Short Time Frames
The swift movements of scalping are meant to generate small profits on shorter time frames with every trade. Such quick intra-day trading can be very appealing when compared to waiting to profit from transactions that can take days, weeks or months.
Fast Execution of Trades
Trades are placed on short time frames such as one to five-minute charts with quick transactions that usually target less than 10 pips per trade. A scalper’s trades typically only last seconds to minutes. Scalpers tend to use charts on shorter time frames in order to quickly recognize entry-and-exit opportunities.
Larger Quantity of Trades
Such fast execution of trades makes for a much larger quantity of trades placed in a single day—sometimes up to hundreds.
Tighter Stop Loss Limits
Scalpers typically use tight stop limits on their positions. The reason for this is simply to minimize loss when trades go wrong.
Consistent Trade Sizes
Consistency is key when it comes to the size of a scalper’s trades. Scalping is based on the principle that profits should cover any losses. Guaranteed, there will be wins. And, guaranteed, there will be losses. When a scalper places small trades here and large trades there, they are increasing their chances of the larger trade ending up the loss. So, by keeping all trades about the same size, no loss is bigger than another.
In trading, higher leverage typically involves a higher level of risk. However, many traders looking to minimize risk typically lean towards the scalping style of trading due to the shorter time frames and faster execution. High leverage (100:1 to 400:1) is the crux of scalping because the shorter the periods that a scalper is a trade means that the amount of risk is decreased. Therefore, there is a certain amount of “risk control” in scalping that is not found in regular day trading.
When is Scalping a Good Option
Most traders tend to be either scalpers, day traders or position traders – sticking to an area of expertise that suits their personality or lifestyle. 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.
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 the market.)
If you want to check out two of the best scalping indicators, you can check out this article.
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 long 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.