Traders, especially those starting out, are often looking for Forex strategies that will extend the scope of the things they can do from their trading platform. It is also common for traders to look for new ways to trade. Today we will answer the question 'what is scalping in Forex?' and will also provide an overview on the best tips and tricks when it comes to scalping currencies online.
Before we begin, we would like to point out that this article will be most useful for traders that already have some knowledge of the market, as we are not going to focus on the basics. We will instead focus on scalping, its application and the best and worst practices. Let's find out more about scalping in the Foreign exchange market below.
What is Forex scalping?
Scalping is a type of day trading style. As we all know, Forex is the most liquid and the most volatile market, hence while many traders are bearing through minor price fluctuations to get a gain of some 100-200 pips per their trade, there is a whole army of Forex scalpers trying to squeeze every possible opportunity out of these small fluctuations in the foreign exchange quotes. In other words, scalping the Forex market is simply taking advantage of the minor changes in the price of an asset, usually performed over a very short period of time.
Scalping is quite a popular style for many traders, as it creates a lot of opportunities within the same day. It's popularity is largely down to the fact that the chances of getting an entry signal are rather high. During the scalping process a trader usually does not expect to gain more than 10 pips and lose more than 7 pips per trade, including the spread. Usually scalping is done with substantially high volumes, which is why many of these traders are not following the common 2% risk management rule, but are trading much higher volumes during their FX scalping sessions.
How to scalp Forex?
Now we have an understanding of the fundamentals of scalping, let's take a closer look at its practical application. In general, most traders scalp currency pairs using a time frame between 1-15 minutes, yet the 15 minute time frame doesn't tend to be as popular. Both 1 minute and 5 minute scalping timeframes are the most common. Try them out and see which one works best for you - if any. Your profit or loss per trade would also depend on the time frame that you are using, with 1 minute scalping in Forex market, you would probably look for a profit around 5 pips while a 5 minute scalp could probably provide you with a realistic gain of 10 pips per trade.
When it comes to selecting the currency pairs for your perfect scalping strategy, it is vital to pick up a pair that is volatile so that you are more likely to see a higher number of moves. If you go for the currency pairs with low intraday volatility, you could end up acquiring an asset and wait for minutes, if not hours, for the price to change.
That being said, volatility shouldn't be the only thing you're looking at when choosing your currency pair. You should also look for a pair that is cheap to trade - in other words, the one that could provide you with the lowest possible spread. As a scalper, you will always see that the spread lies somewhere between 10% to 30% of your income, and of course you would like this value to be as low as possible.
So, how do you scalp in Forex? You need to develop a certain trading strategy based on technical indicators, then you would need to pick up a currency pair with the right level of volatility and favourable trading conditions. After this, once you see an entry signal, you have to go for the trade and once you either see an exit signal, or you have come to a profit that is adequate, you may close your trade.
What is also important in scalping is stop-loss (SL) and take-profit (TP) management. While it is always recommended to use an SL and TP when trading, scalping may be an exception here. The reason is rather simple - you cannot waste time executing your trades as every second matters. You may of course set SL and TP levels after you have opened a trade, yet many traders will scalp in a manual mode without setting any SL or TP. This is especially applicable for 1 minute scalping FX. You may of course use SL and TP, in fact, it is even recommended, if you are fast enough. Many traders will set SL and TP especially if they scalp more than one currency pair at a time.
Now let's focus on the spread part of the trading. Let's assume a broker has no commission attached to your trading account, but the spread on EUR/USD is 2 pips on average. If you usually trade 0.2 lots, you would probably scalp with about 1 lot. Hence, your direct expense would be about 20 USD by the time you opened a position. If you are looking for a 5 pip gain per trade, this means that you would actually have to go up 7 pips from your starting price. If you do the math, you could see that it is nearly 50% extra. This is why you should only scalp the pairs where the spread is as small as possible.
Another important aspect for a successful Forex scalper is their choice in execution system. It can be hard to be successful in scalping the currencies if there is a dealing desk involved - you may find a perfect entry to the market, but you could get your order refused by the broker. The situation may get even worse when you actually try to close your trade and the broker does not allow it, which can sometimes be deadly for your trading account. This is why it is vital to choose a broker that offers STP or ECN execution and is able to accommodate scalping.
We've explained how to scalp in Forex, and shown that the spread and execution are the major points to bear in mind. Let's now examine a possible broker choice.
Best Forex broker for scalping
When it comes to selecting the best FX broker for your scalping strategy, you need to first cross out all brokers that do not allow scalping inside their system. You may be surprised to learn that there are some brokers that do not allow scalping by preventing you from closing trades that last for less than three minutes or so.
After this, you should generally eliminate all of the brokers that cannot provide you with either an STP or ECN execution system as scalping Forex with a dealing desk execution will only hinder you.
Now, when you have a smaller list of available brokers you should start looking at the instruments for your trading and their pricing amongst the brokers. Many brokers do have some commissions and this isn't a bad thing - you just need to include the commission into your calculations when you try to determine the cheapest broker. Nevertheless, pricing should not be the only point that matters when you are selecting a broker that will enable you to scalp Forex.
Admiral Markets provides a great level of service, welcomes all strategies, supplies you with an ECN execution for your trades and has competitive pricing for the major currency pairs, cross ones and even exotics. You may preview Admiral Markets spreads and execution on a demo account before you start scalping, yet we would advise you to actually use a live account for this.
Scalping Forex for a living
Many FX traders are trying to make a living out of their activities and many novice traders are hoping to make a decent return on your investment in scalping. Whilst it is possible, what you have to understand is that scalping takes a lot of time and even though you may make substantial pips, it takes some time to build up. It may be better to employ Forex trading scalping as a good way to jump start your Forex trading career. With scalping you can get a good overview of the technical indicators, learn how to make fast decisions and quickly interpret exit and entry signals. We hope this scalping explanation has helped you, so you can put what you've learnt into practice.