Scalping is an extremely short term strategy common among day traders who involves fast trading environments with a laser focus on chart analysing.
Scalpers focus on price action and technical analysis only and overlook fundamental analysis, even short-term trends within the forex markets because they do not have time to materialise fundamentals before a trade is completed. Merits and limitations of scalping differ from forex scalping to swing trading.
- Scalping is the strategy gear towards gaining from minor price fluctuations.
- In forex trading, scalping is usually utilize for high trade volumes using leveraged positions. You only need to deposit a percentage of the total trade value to open a position; thus, it gives better exposure but comes with many risks.
- Contrary to other short-term trading strategies, scalping aims to accumulate multiple small wins in the shortest possible time instead of a few larger wins over days.
- Scalping is more significant after important data releases and high-impact news, like US employment reports, interest rate announcements, etc. Such releases cause significant price movements in a short timeframe, which is an ideal condition for the scalpers who have to enter and exit trades quickly.
- This short term trading strategy is particularly rife with retail and institutional traders. Forex scalpers capture and take advantage of minor price changes over the shortest available timeframes. The small price movements can lead to significant profit/losses due to large position sizes.
What is Forex Scalping
Forex scalping is a short-term trading style based on buying or selling currency pairs such as EUR/USD and EUR/GBP to gain quick profits through small fluctuating price action within the forex market. A forex trader using scalping usually holds the position for a few seconds to minutes.
Traders take and exit multiple positions within a trading day. The forex market is the only financial market with 24/7 availability; thus, traders can take multiple positions multiple times throughout the day to take advantage of price fluctuations.
Forex involves executing hundreds of trades each day with a holding period of seconds or minutes. They attempt to make small profits, such as 5 to 10 pips (percentage in point) from each position, but at a leveraged position; thus, small profits can be magnified with the increasing trade size. Traders use a pip to measure gains and losses.
- A pip is the slightest price fluctuation a currency can make. Forex scalpers are aimed at creating a more significant profit by the end of the trading day. The base value of the trade determines the pip value.
- When two currencies are paired together with one currency’s value represented in the other’s simultaneously, it is called a currency pair. A currency pair can be a Major Currency Pairs like EUR/USD or Minor Currency Pair like EUR/GBP, AUD/JPY where the first shortened currency name is the base currency, and the latter is the quote currency.
Let us elaborate with an example. Trading the AUD/USD forex market, a movement of 6 pips on a trade of $1,50,000 is $60. Trading $1,50,000 to earn $60 may not look like a fabulous opportunity, but forex scalpers consider the market volume and take advantage by executing such small trades multiple times within a trading day.
Process of Forex scalping
Forex scalping is based on technical analysis. The only element a scalper focuses on is the price.
A forex scalper encounters various trading opportunities within a trading day based on key economic factors that affect foreign currencies’ prices. Some key factors include supply and demand, trade status, terms of trade, interest rates, inflation rates, economic growth, etc.
They observe the impacts through candlestick charts – the support and resistance levels and trend continuations. It helps them scalp trades with the appropriate risk-reward ratio.
Forex Scalping Tools
Before learning scalping strategies in forex, traders need to know the use of scalping forex tools like indicators, charting.
Charting & Indicators
As traders take advantage of small but tricky price fluctuations within small time frames, forex scalping relies heavily on daily chart patterns. Forex scalpers typically use 1-minute charts. These chart patterns help to recognise bullish and bearish zones with potential opportunities. Charting includes understanding how to read candle wicks.
The most commonly used scalping strategies are:
- Moving averages for scalping forex
- Forex relative strength index (RSI) Scalping
And common forex indicators include:
- Moving average convergence divergence (MACD)
- Bollinger Bands,
Forex scalping strategies can be manual or based on an automated system. A manual system involves hours of sitting in front of computer screens to identify signals and deciphering whether to make a buy or sell trade. In contrast, automated trading or system trading involves setting specific rules for entry and exit points. A scalping bot will make trades based on a range of set indicators and rules when to scan the market. Thus, it’s valuable to combine trading strategies, technical analysis, and indicators to identify profit potential trading opportunities.
Risks Involved in Scalping
Short-term trading like forex scalping is consider more speculative than a traditional buy and hold approach as for forex trading, and a scalper needs to manage and control risks involved in leverage, spreads, fees, and slippage as much as possible.
- Consider risk management before entering into a trade.
- Follow the 1% Rule. Never risk more than 1% on any single trade.
- Follow the 5% Rule. If you lose more than 5% on a trading day, call a quit for the day.
Lightning-fast execution, precise charting and accurate insights are crucial for forex traders. To take advantage of scalping, forex traders require a trading platform offering advanced order types with guaranteed stop losses, partial closure, tight spreads and all at competitive forex costs.