Scalpers will buy and sell a foreign currency pair, only occupying the position for a few minutes. They then repeat this process throughout the day to gain frequent returns by taking advantage of price fluctuations.
In the Forex space, another name for the smallest price movement a currency makes is pip (percentage in point), which traders use to measure gains and losses. They usually aim to scalp between 5-10 pips from each position, aiming to make a substantial profit by the end of the day.
How Forex Scalping Works?
Scalping in forex is a strategy that involves opening and closing multiple positions on one or more Forex pairs throughout a day, usually in seconds or minutes.
This is not unlike day trading, in which traders will open a position and then close it again during the same trading session, never holding a position overnight or carrying it into another trading period. But while day traders may seek positions once or twice, or even a few times a day, scalpers are much more chaotic and deal with multiple trades during a session.
While a normal trading session means you trade-off five -and 30-minutes charts, scalpers often trade off of tick charts and one-minute charts. Specifically, some scalpers like to try to “ride” the high-velocity shifts that happen around the time of the release of news and data.
To start scalping, you will need:
- An amount of money that you are willing to risk
- An account on a Forex broker platform (check this list of Forex Brokers accepting US clients)
- Time that you need to set aside to learn & trade
- A scalping strategy that works for your personality
Scalping isn’t for everybody. You have to be perfectly calculated for this risky process. Those who truly succeed at scalping are traders who love sitting in front of the displays for the entire session, and they need to enjoy the intense concentration that it takes. Nothing should distract you when you’re trying to scalp a small move. Even as a highly temperamental person, you must react quickly without overthinking your every move. Consider this: Closing a losing trade can be a psychological battle when you’re scalping because you need to be impulsive and make a decision as the price can always swing in your favor or against.
- Picking More Volatile Pairs
Spreads aren’t the only helpful criteria when picking currency pairs for a scalping strategy. Volatility should be top-of-mind criteria as well. Since this trading method seeks quick gains, the market has to move faster to generate those returns.
Less volatile pairs aren’t fit for scalping since it might take much more time for the rates to move. So instead of a five or ten-minute trade, you might have to wait for an hour or more for the pair to reach the desired level.
GBP/AUD, GBP/NZD AUD/JPY are some examples of the currency with relatively higher volatility. IN fact, Silver and Gold prices usually also experience a higher degree of variation during trading days.
- Using Simple Moving Averages
Following technical indicators used in the Forex scalping strategy, the Exponential Moving Average (EMA) or Simple Moving Average (SMA) can be a very helpful tool for many traders. Depending on your preference, you can use a 5, 10, 50 or even 100 periods EMA or SMA or higher. To do this right, you will need to look at the direction of the moving averages and open positions in accordance with them. Clearly, extended trades might require much more analysis, but in 1 to 15- minutes trades, it might generate some profit. This might not be the best Forex scalping method, but it can work for beginners.
- Following the Bollinger Bands
This can also be a very handy scalping indicator. Bollinger Band lines indicate that the market is preparing for tight-range trading. Here’s how it works: a trader buys a currency pair that’s very close to the lower bound and sells pairs where the price is near the upper band.
Obviously, this doesn’t guarantee success in all positions, however, this strategy might help you win the majority of the trades.
- Choosing Pairs with Lowest Spreads
Forex scalping strategies aren’t about making generous returns on one or two trades. Scalping is only about small pip gains.
That said, massive differences between buying and selling prices can easily eat into those margins and take out considerable gains. Therefore, those who are considering how scalping might be more selective about the currencies they wish to trade and Brokers.
- Look after Support and Resistance
This might not be your favourite scalping strategy, but it is very simple. It’s similar to the Bollinger Bands technique, but instead of looking at the Bollinger charts, you can just take a look at the support and resistance.
Fortunately, finding out about those levels isn’t rocket science. Forex news platforms publish 3 support and 3 resistance levels, and more often than not, these levels are considered stronger and more likely to hold the line compared to other ones.
That said, you can read the latest technical data from the Forex news platforms, then buy currency pairs close to support levels and sell those which trade near resistance.
Scalping is without question an extremely effective trading style. But it’s important to understand that scalping is hard work. That means you will only be rewarded for quantitative work. The more you perform, the larger the returns will be. In the end, your trading strategy has to match not only your style and abilities but also your personality.