A beginners’ guide to forex scalping
Forex scalping is something that has always caught the fancy of traders. There are many debates on whether forex scalping is a good way to trade the markets.
Table Of Contents:
- A beginners’ guide to forex scalping
It should be noted that there is no right way or a wrong way to trade the currency markets. Thus, when quantifying the trading methods, the only two measures are whether your trading strategy is profitable or not.
Forex scalping is a name given to a type of trading that is usually quick in terms of profit and loss and short in terms of duration. Forex scalping is one of the different ways of trading that traders use for trading the markets.
Scalping is not just confined to the spot forex markets. You can scalp other markets such as futures for example.
Forex scalping typically lasts not more than a few minutes. Of course you could stretch this time frame to more than five minutes. Profits with forex scalping primarily relies on the contract size that you trade.
Therefore, it is common to find that forex scalpers take advantage of the leverage opportunities and of course the volatility in the markets.
Profits with forex scalping relies on the small movements in the price of the security that is being traded. A 5 pip move in an instrument can be all that you need in order to be profitable with forex scalping.
But of course, there are some risks to forex scalping as well. Most importantly, not all traders are made out to be forex scalpers. You need to be quick to react to the ever changing markets and certainly you should have a good understanding of the markets that you are trading.
If you think that you can profit with forex scalping by using a random trading strategy or just blindly buying and selling, then you are wrong.
In this article, we take a look at what forex scalping is all about. We address the differences between forex scalping and other types of trading methods and also discuss what it takes to build a profitable forex scalping system.
Is forex scalping profitable?
Forex scalping is no doubt profitable. The fact is that traders are able to trade and capture the small movements in the currency markets on an intraday basis makes this a much sought after trading strategy.
If you are consistent in the profits that you make and have all the other issues sorted, then there is no question why forex scalping cannot be profitable. The ability to make profits with forex scalping depends on factors such as the amount of experience you have as a trader, your trading strategy and the currency pairs that you trade.
Traders mistake forex scalping to be easy, but on the contrary it is a bit difficult. You will need to put in a lot of efforts and have a good understanding of the markets that you are trading.
In order for forex scalping to be profitable, traders also need to have a good and a familiar trading strategy in place. By familiarity, we mean the ability to manage a losing trade as well.
The best way to hone your forex scalping skills is to practice with a forex demo account and put your trading strategy to the test under different conditions. Some forex scalpers make use of preferred times such as when a trading session opens.
You can also scalp the markets based on breakouts, trend following or trend correction based trading strategies. When it comes to forex scalping, the sky is the limit and you are only limited by your imagination and creativity on how you can build strategies that are suited for the short term time span.
The more familiar you are with your forex scalping strategy, the higher the chances that you can be more profitable.
Consistency is also another key factor. Consistency in forex trading plays a major role regardless of whether you are a scalper or a swing trader. Consistently simply means the ability to make profits regularly.
While your trading strategy can give you big profits, it is the consistency in the profitable trades that will determine whether your forex scalping strategy is profitable or not.
You also need to exhibit a strong level of discipline in your approach to forex scalping in order for it to be profitable. Therefore, a trading plan is just as important for forex scalping as it is important for just about any other form of trading.
There have been numerous arguments on the pros and cons of forex scalping. The bottom line is that the ability to make forex scalping profitable can vary from one trader to the next. At the end, it is the trader’s capabilities that will determine whether forex scalping can be profitable or not.
Can you make a living out of forex scalping?
You can make a living by forex scalping as long as you can master the skills. Most traders switch to forex scalping either because they hear from their friends or on forums when traders boast about the amount of money that they made.
You can basically make a living from forex scalping but it requires you to be adept at what you do. Learning a forex scalping strategy and expecting it to earn you money is certainly not ideal.
Another factor that can determine whether you can make a living by scalping the forex markets is the amount of capital that you have. Most retail traders tend to make a deposit of around $500 - $1000.
While there are some who can afford to deposit even higher amounts, these are not the majority.
To be able to make a living by forex scalping, you need to have a good capital that can help you take advantage of the leverage. The question is whether you are able to risk such huge capital (bearing in mind the fact that you are trading with funds that you can afford to lose) in order to make a living.
For example, a 5 pip move in a currency can be either $5 or $50 depending on whether you trade a mini-lot or a standard lot. Thus, a trader with smaller capital can be successful at forex scalping, but when it comes to making a living out of this, it is out of the question.
Also just because you have huge capital does not automatically qualify you to start making a living with forex scalping. Due to the nature of the way forex scalping is done, you can risk the money and end up losing your capital quite quickly if you do not know what you are doing.
So the answer to the question on whether you can make a living be forex scalping is yes as long as the trader in question is experienced and has the capital that they can afford to risk.
What is considered scalping in forex?
At this point, you might be wondering how forex scalping works and what is considered to be scalping in forex. Chances are that you might be questioning yourself if you are scalping the forex markets based on your existing trading strategy.
If you look at the daily chart for example, on a typical day, you can expect the price of the instrument to move a couple of pips (a pip is a single unit of change in a currency and is the fourth decimal).
Forex scalpers are those who trade on an intraday basis. They focus on the short term volatility in the instruments and capture small pips as a result. Profits are maximized basically by use of large capital and leverage.
Scalping is often seen around news releases. This is when the markets tend to be volatile. For example, central bank interest rate decisions and other key economic releases such as unemployment reports and key political decisions tend to bring a lot of volatility to the markets.
A forex scalper positions himself in such a way that they aim to make a profit regardless of the direction of the price.
Forex scalping strategies can employ a number of techniques ranging from simple candlestick patterns to chart patterns or even the use of technical indicators. The bottom line with forex scalping is that traders make a quick profit as and when the markets presents an opportunity.
Forex scalping is also confined to the time limits of just a few minutes. Anything that goes beyond a few minutes can be categorized into day trading, also known as intraday trading.
With forex scalping a trader’s primary goal is to identify potential price movements in the security and attempt to make a profit based off this volatility. The trader also needs to constantly watch their trades to ensure that they are in control of their positions.
A simple forex scalping strategy
Most of the forex scalping strategies focus on break out of trades. Break out trades occur after price has been consolidating for a while. This sideways price action tends to eventually see the price of the security breaking out strongly.
The breakouts are usually strong and rapid and of course this can itself present a major risk.
The one-minute forex scalping strategy
There are many one-minute forex scalping strategies depending on the source where you get the information from.
In this one-minute forex scalping strategy we make use of just one indicator. The Bollinger band indicator is one of the most versatile indicators and is apt for volatility, Developed by John Bollinger, the bands, are made up of two outer bands and a middle band.
The Bollinger bands are based on a 20-period moving average with the outer bands set apart at two standard deviations.
The next element of this one-minute forex scalping strategy is candlestick patterns. We primarily focus on reversal patterns such as bullish and bearish engulfing patterns, doji patterns such as the dragonfly doji or the gravestone doji to name a few.
Depending on how familiar you are with candlestick patterns, you can expand this one-minute strategy to also look for other key candlestick patterns that you are aware of.
The key to this strategy is to look for reversal candlestick patterns when price is either at the upper or the lower Bollinger band or if the bands are sloping strongly, we look at the reversal patterns near the mid-band.
Firstly, let’s take a look at the chart set up, shown below. This is a very simple strategy and also as you can see, the charts are very clean.
The first step with this one-minute forex scalping strategy is to look at the slope and the width of the Bollinger band. Typically, you should see the Bollinger bands sloping downward if you are looking at short positions.
Likewise, if you are looking for long positions, the Bollinger bands should be sloping up.
Long and short positions are taken based on key candlestick reversal patterns that occur at the lower or the upper Bollinger bands.
Thus, when you account for the slope and width and the candlestick patterns, you are ready to scalp the markets when the volatility is rising and you have a perfect trading opportunity set up for you.
But first, let’s look at how not to trade with this one-minute forex scalping strategy. The chart below shows the highlighted rectangle. Here, you can see that while there have been some candlestick reversal patterns at the lower end of the Bollinger band, it would not have been profitable.
This is because, the slope of the Bollinger band is down. Therefore, in such scenarios, we look for short positions that are formed near the upper Bollinger band. Another scenario is when the Bollinger bands contract.
When the bands contract, it represents sideways price action. Thus, it is best to stay out of such markets.
Now let’s take a look at the one-minute trading strategy itself.
In the next chart, you can see an example of a long position that is taken. The basis for taking this trade is that price dips down to the lower Bollinger band. At the same time, you can see that the bands are expanding.
This signifies increased volatility in the markets. Near the lower band, you can see a bullish harami pattern that is formed. Following this pattern, price breaks out to the upside.
We enter the trade at the high of the first candlestick and set the stop loss to the candlestick’s low.
The target is set to the corresponding upper Bollinger band level. Within a few minutes, price breaks out sharply and reaches the target.
As you can see, the scalping strategy is quick. You can also adjust your risks to ensure that the risk is removed by moving the trade to break even.
In the next example, we have a short position that is taken. The methodology used is quite similar to the one described in the long position scalping example.
In the above example, we see that there is a small contraction in the Bollinger bands. At this point, you can see that the Bollinger bands are also starting to slope lower.
Near the mid-band, we can see a bearish engulfing pattern that was formed. Thus, a short position is taken at the low of this engulfing candlestick. The stops are placed near the highs and the target is set to the lower Bollinger band level.
Price action quickly hits the lower Bollinger band leading to a winning trade in a matter of minutes.
The main takeaway from this one-minute forex scalping strategy is that traders need to make use of the right combination of trades. You can easily build your own forex scalping strategy using any of the indicators that you are familiar with.
While it is easy to get absorbed into forex scalping, forex traders need to be disciplined when it comes to scalping. Achieving a few winning trades can make you overconfident as you apply the strategy to other instruments or currency pairs.
Without proper analysis, this could lead to giving back all the profits that you made.
How to build a profitable forex scalping strategy?
When looking to build a profitable forex scalping strategy, traders need to focus on three main aspects:
- Time
- Risk management
- Volatility
- Discipline
- Broker conditions
Time: To build a profitable forex scalping strategy, the first thing to note is that it takes time. Unlike other forms of trading, with forex scalping you need to be ready to trade whenever the market presents an opportunity.
Not many traders an afford the time required to constantly monitor the charts. One way to address this issue is to focus on one currency pair and observe the times when volatility rises.
For example, volatility typically rises during overlap of two trading sessions. This brings increased liquidity to the markets. While one trading session comes to an end, the other trading session is just getting started.
Therefore, traders tend to either close off or open positions depending on whether the trading session is starting or ending.
Risk management: Risk management is also an essential aspect of forex scalping. While the basic purpose of forex scalping is to make money by taking advantage of the volatility, there is a good chance that your trade can quickly slide into a loss.
Having a good risk management in your forex scalping strategy is important. This will ensure that you do not get too caught up in the day to day market movements but focus on the amount of money that you are likely to risk.
Volatility: Volatility in the markets is of utmost important. Obviously, you can expect to trade, let alone make any money if the markets are trading flat. When there is higher volatility in the markets, there is scope for prices to exhibit strong intraday movements.
This allows traders to capture these strong price movements and scalp the markets for a few pips of profits.
Discipline: Having disciplined approach while you are scalping the forex markets is also essential. There are many articles written about trading psychology. With scalping, due to the amount of action that takes place, one can easily give in to their emotions.
This can lead to the trader taking on unnecessary risk which can potentially lead to losses that could have otherwise been avoided.
A good discipline in forex trading cannot be learned overnight. Traders need to consciously practice to learn how to be disciplined in order to make it second nature. Discipline in forex scalping can also keep you from over-trading.
Just because you see a currency pair that is volatile shouldn’t be the reason for you to dive in with your forex scalping strategy.
Broker conditions: A successful forex scalping strategy also needs to focus on the broker’s trading conditions. Typically, volatility in the forex markets rises during key news releases. This can lead to widening spreads in the market.
When spreads widen, there is a good chance that your stop loss or your take profit levels can be abruptly hit. The spreads can also depend not just on news releases but also on the type of instrument that you are trading.
For example, spot silver tends to have a significantly wider spread compared to gold. Likewise, the spreads in minor and exotic currencies are much higher compared to the majors. Therefore, traders need to pay attention to these factors when building a profitable forex scalping strategy.
Most importantly, you should check with your forex broker’s terms and conditions. Not all forex brokers will allow scalping the forex markets. And when you are trading with pending orders, there is also a certain limit from the current price at which you can set these pending orders.
All of these factors, while seemingly trivial end up playing an important role in the success of your forex scalping strategy.
Is forex scalping same as intraday trading?
It is easy to think that forex scalping is the same as day trading or intraday trading. After all, forex scalping is all about opening and closing positions within the same day. This is also the same when you are day trading. Right?
Well, not really.
Forex scalping is basically a different type of trading strategy compared to regular day trading strategies. Scalping the forex markets can last for a few minutes to an hour at the most.
Any trading strategy that goes beyond the one-hour time frame can be safely considered to be an intraday trading strategy.
You can also see that there are some significant differences between the way scalping and day trading strategies work. For day trading strategies, you can simply set your entry, stop and target levels.
Chances are that the profit levels you set are fairly easy to be reached (whether it is stop losses or target levels). With forex scalping, traders need to constantly attend to their charts. A momentary distraction can be all the difference between a winning and a losing trading.
With day trading, small issue such as spreads don’t make much of a difference. But with forex scalping, traders need to pay attention to these factors as well. Spreads can play a significant role with forex scalping as they can quickly erode into your profits.
Most forex scalpers tend to trade with a fixed spread broker because this will allow them the security that the spreads will not widen due to market volatility. But at the same time, trading with a fixed spread broker also has its downsides as the broker in the first place might not allow you to scalp the markets or will make the conditions difficult to meet.
Regardless, the point being that while forex scalping and day trading look similar, the strategies and the methods required are vastly different.
Difference between forex scalping and swing trading
Now that we explained the difference between forex scalping and day trading, let’s also look at the difference between forex scalping and swing trading.
Both these styles of trading are as far apart as the earth and the sky.
As mentioned earlier, if you are one who likes action and a quick return on investment, forex scalping is just right for you. On the other hand, if you are more patient and expect to trade on the long term with slow but steady profits, swing trading is the option to choose from.
But
it is not just the profits that determine that differences between scalping and swing trading.
Truth is that almost every trader who started trading has at some point scalped the forex markets. Some eventually prefer the more slower paced swing trading. Of course, this is not to say that swing trading is less interesting.
There are a lot of differences between forex scalping and swing trading, right from the trading strategy that is employed to the entry, stop and target levels that you set.
Obviously, other distinctive differences between swing trading and forex scalping also has to do with the chart time frames. While scalping is mostly confined to 1, 5 or 15 minute chart time frames at the most, swing trading is usually confined to 1-hour, 4-hour or daily chart time frames.
With swing trading, you are essentially capturing the long term trends in the markets. Thus, as it takes time for the trends to evolve, so does it take the same time for your trades to realized as well.
With forex scalping your focus is on trading the market volatility. Very seldom is a forex scalper bothered about the long term trends. As long as there is good volatility in the markets and price move strongly, forex scalping is profitable.
Forex scalping - Conclusion
In conclusion, forex scalping is not made for everyone. While it brings a lure of the temptation to make quick profits, the risks are equally the same.
Furthermore, not all traders have the same psyche and the risk tolerance. At times, it can be intimidating, if not daunting to consistently scalp the forex markets on a daily basis. At some point, traders can get tired of the amount of attention it takes to become a profitable forex scalper.
However, rewards are given for those to take risks and forex scalping is almost the same. To be successful with forex scalping, traders need to have a thorough understanding of the markets they trade and also know the reasons why the market is behaving the way it is.
Forex scalping can be seen to be somewhat similar to algorithmic trading. The only difference is that while algorithmic trading is automated and employs the use of robots, forex scalping requires some human intervention.
There are quite a few traders who also focus on automating their forex scalping strategies. But to be successful within such automated trading strategies, traders need to put in a lot of work and back test and fine tune their trading strategies until they can reach a point when their forex scalping strategies can start bringing profitable results.
At the end of the day, it is up to the trader to decide whether forex scalping is an option worth considering. If you can dedicate the time and efforts required there is no doubt that you can become a profitable forex scalper.
As mentioned earlier in this article, forex scalping requires a certain mindset. Just like not everyone reacts the same way to risk, it is the same with forex scalping as well. The question is whether you as a trader are ready for this action packed trading approach.
Although forex scalping is quick and short term, the amount of time it takes to analyze the markets is no different from how an intraday trader or a swing trader would conduct their analysis.
Therefore, forex scalping which can allow you to make big profits in a short span of time requires the same amount of dedication and study of the markets. With good practice, you will be able to build your own forex scalping strategy that can be profitable, provided you have the right mindset and the risk tolerance.
