Forex Scalping: A Fundamental Explanation

Ibeth Rivero

Many Forex traders use FX scalping as their primary trading method. However, Forex scalping trading is not for everyone, but it is suitable for a very specific type of trader. In this article, I will explain what scalping is, whom it is suitable for, how you do it, and whether scalping Forex strategies work.

Not all Forex brokers are suitable for scalpers, so if you decide you want to be a scalper trader, check out our list of suitable Forex brokers for scalpers.

What is Scalping in Forex?

Scalping is a style of trading that has become very popular, mainly because it can provide a lot of opportunities to make money. It is also very quick. Although there is sometimes a lot of waiting around, the profit or loss usually comes very quickly, so you do not have to sit biting your nails for hours wondering whether the trade is going to be a success, and where you should exit it. Very often the whole trade takes only a few seconds.

Scalping is the act of making fast trades for (usually) small profits, in and out for a few pips.

Forex scalping is a trading method by which the trader makes quick and small profits by opening and closing new positions within minutes. A scalped trade can remain open for three to five minutes, with the majority of such trades staying open for as little as one minute. Scalping FX is a popular trading method primarily because the inherent risk of Forex is minimized when scalping. Since trades are only open for a minimal amount of time, the danger in a fluctuating market is much lower than in traditional trading methods due to a lower level of market exposure.

While day traders are focused on concepts like trends and ranges, scalpers concern themselves mainly with the bid-ask spread. The volatility of the Forex market, therefore, affects scalpers less than a trend follower or day trader.

Is Scalping for Everyone?

Scalping is most definitely not a suitable trading method for the majority of Forex traders. The profits made from scalping are understandably much lower, and the scalper depends on many small profits as opposed to making it big with one specific position. The scalping technique lowers your risk as a trader, and on the flip side, lowers your potential for great profit. When all of a scalper's small profits are combined, however, it can add up to a lot.
Taking human nature and accepted trading psychology into account, the scalper has to be a patient and diligent individual who is willing to forego the desire for instant gratification and wait patiently while their trading account grows. An excited and impulsive person will achieve nothing by scalping, in fact, their blood pressure and frustration are sure to increase.

Another characteristic that is necessary for successful scalping is a high level of concentration. While some day traders might open a position, go out to eat, then come back and close the position based on the latest market developments, the scalper must be concentrated on their open positions at all times, and have their finger on the trigger, in preparation for their next move. It requires a serious attention span as well as the ability to stay glued to one screen for an extended period of time.

If you are not a fulltime trader, and do your trading on the side, you must realize that scalping is a time-consuming technique that might not be suitable for your schedule. There is always the automated trading option, but this can be dangerous option. A trader that feels that scalping is the right method for them can also consider semi-automatic scalping systems.

With such a tool, your scalping would not require you to stay glued to your screen full-time but would still require a high level of attention.

The Importance of Consistency 

Forex scalping strategy

Forex trading in general, requires consistency on the part of the trader. This is magnified when it comes to scalpers. Trading unpredictable size positions will inevitably lead to a closing of your trading account. The scalping method, after all, is based on the principle that your small profits will overpower your losses. This will not necessarily work if you open large trades and lose.

What Do I Need to Scalp Successfully?

Before we get too involved in the question of how to do it, you need to be properly equipped to do it right to have a chance of succeeding. Unfortunately, just knowing how to do it is not enough. This is because the essence of scalping is taking advantage of fast execution and reasonably tight spreads. If your broker is unable to offer these, then even if you know what are doing and do it right, you will not be able to scalp profitably. So, the first thing you need is a high-quality broker that executes trades quickly without rejecting them just because the market is moving fast. At the retail level, this is not so very easy to find.

Which Pairs Should I Scalp?

There are two types of directional trading, by which I mean traditional long or short trading. You either bet that the movement will continue from a particular level, or that it will reverse. Either way, what are relying on in order to make a profit is the meaningfulness and quality of support or resistance levels. This leads to an important point which is often neglected: major pairs produce more meaningful support and resistance levels, because they are real and not synthetic. For example, if EUR/USD has not touched 1.30 in a long time, and after falling more than 100 pips hits that level, it is very likely to make some kind of bounce upwards, providing an opportunity for a long scalp. If EUR/AUD has not touched 1.30 in a long time, it is less likely to provide a bounce, because what is really important is what is going on with EUR/USD and AUD/USD. So, stay away from trying to scalp crosses, unless both of the crossed currencies have a scalp at exactly the same time against the USD.

You should stick to the four majors and perhaps also AUD/USD and USD/CAD. Notice that the JPY is “looser” than the USD, and for this reason can be harder to scalp.

Strategies for Scalping

Simply put, you are going to get better results by looking for reversals instead of continuations. This will tend to mean trading against the trend, or at least the short-term trend. Do not worry about that. What you need to do are look for levels that are likely to provide a bounce. They key levels to look for can be found as follows:

Highs and lows of previous days, weeks, and months, especially where that end of the candle has a relatively long wick.

Weekly and monthly opens.

Round/whole numbers.

Pivot points.

The first two are the most important. Where they are confluent with round/whole numbers and pivot points, they are even stronger. Where there are several of these levels lined up together, they become even stronger. If the anticipated reversal is in tune with the long-term trend, this is even better, but not essential.

The most important thing however is not just to identify the most probable levels at which there are going to be bounces. What is important and often overlooked is HOW the price gets there. As a rule, the faster the price moves there, and the greater the distance it has to travel to get there, the better. For example, if the Average True Range of the previous twenty days is 100 pips and the price races up to a round number that was also last week's high and is approximately 100 pips from today's low, you have a high probability of a bounce, so you can probably make some short pips off this level.

Executing Scalping Trades

There is no substitute for executing these trades manually. Of course, if you think 1.30 is going to be a good level for a bounce, you could set a limit order at that level. However, sometimes the price might stall just half a pip away from that level before turning around, in which case your order would not get filled. For this reason, it helps to scalp with your finger on the trigger manually for both entries and exits. This is why it is so important that you use a good broker.

The advantage of scalping is that you only need and expect to get out with a few pips of profit. This is another reason why you need to have your finger on the trigger and your eye on the price. You will “feel” where the price is starting to turn.

It is a good idea to take something like 80% or 90% of a winning trade off at the first pause, and leave the rest on the table while moving the stop loss to break even. You will eventually get some huge winners where what began as a scalp can become a major long-term swing high or low.

Perhaps the hardest thing about scalping is knowing where to put your stop loss. It might be better to just put an emergency stop loss on and get out manually when you feel the level really start to break in the wrong direction. It is worth remembering that it helps to keep stop losses tight, because where you are looking for bounces, the good trades should bounce pretty tightly.

Does a Scalping Forex Strategy Work?

What is a Scalping Forex Strategy?

A Forex scalping 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 Forex scalping 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 can mean that a scalper will be very highly leveraged by account size upon entering a new trade, then this action may violate the main concepts of most risk and money management strategies.

When to Scalp?

A Forex scalping strategy will often 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 Forex scalping 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, as you will see if you consider the following example. Assume that you have selected a profit target of 5 pips and a stop-loss of 100 pips per trade. Consider that your Forex scalping strategy produces a 98:2 win-to-loss ratio. Now, although your Forex scalping 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.

Bottom Line

Scalping is not suitable for everyone. It is a very challenging albeit potentially rewarding trading style. It is usually not a good idea for a complete beginner to start with a scalping style. Beginners tend to do better trading higher time frames such as daily or 4-hour price charts.

The key to successful scalping is having a very strong level of patience and self-discipline. This is because the best scalping trading strategy is to enter trades at key support or resistance levels anticipating a reversal, and such major levels in major Forex currency pairs do not get reached every day. The successful scalper must be prepared to spend hours in front of a price chart without taking a single trade on many days.

Despite the challenges, scalping can be very profitable for a highly skilled trader, but the use of a relatively cheap Forex broker offering a low cost of trading is essential for success.

FAQs

What is scalping in Forex trading?

Scalping is a Forex trading style which aims to take trades of very short duration for relatively small profits in terms of pips.

Does a Scalping Forex strategy work?

Scalping strategies based on trading reversals from key support and resistance levels, or trading reversals following retracements in very strong trends, can work very well. However, they require trading skill and experience to execute successfully so can be challenging for Forex beginners.

Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.

Did you like what you read? Let us know what you think!

exclamation mark

Please make sure your comments are appropriate and that they do not promote services or products, political parties, campaign material or ballot propositions. Comments that contain abusive, vulgar, offensive, threatening or harassing language, or personal attacks of any kind will be deleted. Comments including inappropriate will also be removed.

1 User comments
Anubavsheik
2014-11-20 23:23:16Z

Scalping in my view is one of the best way to make quick money, but it is equally risky, therefore if we are doing it than we must know the negative points of losing heavily and also lot of things depends on the brokerage company, as rarely there are any broker that allow us to trade freely especially with scalping, so I always love to trade with OctaFX brokerage company only, it not only allows me freedom to trade my own way, but have low spread of just 0.2 pips and smooth execution of all trades making scalping easier for me.


exclamation mark

Please make sure your comments are appropriate and that they do not promote services or products, political parties, campaign material or ballot propositions. Comments that contain abusive, vulgar, offensive, threatening or harassing language, or personal attacks of any kind will be deleted. Comments including inappropriate will also be removed.

Read more
Add new comment
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.