Scalping is a rapid trading strategy best suited for traders who want quick results. The main idea of scalping is to gather profits from numerous short-term trades. A forex scalping strategy allows traders to take advantage of the short-term fluctuations of any forex currency pair.
- What is scalping?
- Forex scalping strategy steps
- Example of scalping in Forex
- Risk management for scalping
What is scalping in forex?
Forex scalping is a popular day trading strategy. A forex scalper takes advantage of the short-term price changes, pullbacks, and reversals common throughout a trading session. Scalping forex strategies focus on small gains from small investments, though the position size may be increased with leverage.
Usually, forex scalpers will hold open positions anywhere between several seconds to several minutes. Traders wait for the position to become profitable, and close it shortly after. All scalping trades are opened and closed within the same trading day, without keeping any deals overnight.
While scalping is most used in the events of important financial data and news releases, it can be applied at any time to any forex currency pair. One of the main advantages of this strategy is its accessibility for traders on a budget. Scalpers often operate with small investments (starting from $1) and gather small profits from short-term trades. At the end of the day, the small returns add up to a sizable profit, given that most trades were successful.
Forex scalping strategy
Scalping is an effective strategy for trading forex. It allows traders to catch short-term price changes, without focusing too much on the bigger picture. Using scalping, traders can make anywhere between dozens and hundreds of trades in one day, the limit being only their trading plan and capital.
Leverage is a significant instrument for many forex scalpers, as it allows them to increase their position size while keeping their investment amount small. However, increasing the leverage simultaneously increases the risk associated with the trade.
The mechanics of a scalping trade in forex can be described in a sequence of steps.
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- Forex scalpers choose the currency pair(s) they wish to focus on. Volatile assets will present scalping traders with more opportunities for entries;
- Scalpers use technical indicators to determine potential entry points on the chart and trade with or against the trend;
- The appropriate stop-loss (SL) and take-profit (TP) levels are set and the position is opened;
- The trade is executed when either the take-profit or stop-loss level is triggered;
- The trader repeats the steps to execute all the following trades.
Forex scalping strategy example
Let’s see how a forex scalping strategy trade can be executed using the sequence of steps described above. In the screenshot below the crossover of the Moving Average indicator shows that a “Buy” scalping trade can be opened on GBP/USD to trade with the upward trend.
A trade can be placed at the price of 1.26860, with a TP level 10 pips above, at 1.26870. Scalping allows for a tight SL level, which can be placed 5 pips below the entry, at 1.26855.
With the leverage of 1:500, the margin (investment amount) is $25.38, and the cost of 1 pip equals $1. This means that if the trade closes at the take-profit level, the trader’s profit will be $10. In case the stop-loss level is triggered, the trader’s loss will be $5.
Risk management for scalping in Forex
As with any trading approach, forex scalping can be a risky strategy, especially if a trader neglects all risk management tools or doesn’t remain consistent with his or her approach. While traders try to execute as many profitable trades as possible, losses can also add up quickly. There are several important money management tools that every forex scalper has to consider.
Setting stop-loss and take-profit levels
Being a fast-paced approach that places high importance on timely entries and exits, a scalping forex strategy demands the use of stop-loss and take-profit levels. Using a SL is crucial to ensure that trades close at the right time, with the minimal loss possible. At the same time, a take-profit level will ensure that a trader exits the deal as soon as the desired profit is reached and avoids unnecessary risk. Using SL and TP helps automate the process and allows the trader to focus on finding more market opportunities.
Timely exits
It can be hard to close a trade that is going in your favor, however, it is important to remember that forex scalping is all about short trades with small profits. A typical return that a forex scalper aims to make is around 5 to 20 pips. While the prospect of a larger gain can be attractive, it goes against the mechanics of the scalping strategy. The longer the wait to close the trade, the higher the chance that it might turn against the trader and potentially erase all of the hard-earned profits until that point.
Considering slippage
Slippage can occur when the asset price changes too rapidly, making it impossible to trigger the stop-loss level on time. This can result in a larger loss than was expected, with the deal closing further than the set SL. It is important to account for the rare, but possible, slippage to manage all potential losses.
To sum up
The scalping forex strategy described above is an effective and popular approach among traders who prefer intraday trading with fast-paced trades. Forex scalpers make dozens or even hundreds of trades daily, gathering small returns into sizable profits. Though it is a relatively uncomplicated strategy, it requires the use of technical analysis and risk management instruments to hedge risks and protect the trader’s capital.
