By: Terry Allen
What is a Scalping Forex Strategy?
A scalping Forex strategy is a trading methodology that utilizes the shortest time frames available (known as a tick) for 1 minute, 3 minute and 5 minute periods. Forex scalpers focus on very small price movements and evade volatility as a primary consideration. They seek trading positions which allow them to perform multiple trades in very short periods of time whilst targeting small profits of 1 to 5 pips each time.
Forex Scalping Compared to Traditional Strategies
For example, whereas the primary aim of a more traditional strategy may be to undertake three trades per day with 100 plus pip targets each, a scalping Forex strategy would attempt to fully action hundreds of trades within similar time periods whilst targeting only 5 pips each time. As you can verify, the former strategy could produce a maximum profit in excess of 300 pips compared to that of the scalping Forex strategy which would be in the region of 500 pips.
Larger Risks Involved
However, in order to obtain the optimum results for a scalping Forex strategy implies that its users will need to risk more per pip than other strategies so that worthwhile profits can be produced. As such, as this requirement means that operators must risk a good deal more than 2% of their total equity per trade then this action violates the main concepts of most risk and money management strategies.
When to Scalp?
A scalping Forex strategy will normally advise that you should attempt to trade Forex during its quitter periods when trading patterns tend to be more predictable and the levels of volatility are much lower. As such, the time period that is normally chosen for this type of trading is between 5.00pm and 9.00am EST during which time major countries, such as the US, UK and the Eurozone, do not normally release important economic data.
Important Components to Consider
In order to attain consistent profits, a scalping Forex strategy needs to possess both a high win-to- loss ratio and a well-tested stop-loss strategy. As such, many scalping proponents utilize very small pip profit-targets together with relatively large stops and a high win-to-loss ratio. However, the utilization of such parameters normally means that the applicable scalping Forex strategy will also possess very poor risk-to-reward ratios.
Justification for a Scalping Forex Strategy
Is it still worth developing or designing a scalping Forex strategy if it will only eventually possess a very poor risk-to-reward ratio? Yes it is, if you consider the following example. For instance, assume that you have selected a profit-target of 5 pips and a stop-loss of 100 pips per trade.
Consider that your scalping Forex strategy produces a 98:2 win-to-loss ratio. Now, although your risk-to-reward ratio will be extremely bad at 100:5, you would still achieve a profit that would be equal to (98*5)-(2*100) equaling 290 pips. However, although this sounds impressive you must also realize that you only need two additional losses to completely reverse this result practically wiping out all your profits in the process.