What is Scalping in Forex? How to do it?
Scalping in Forex is one of the most used strategies by advanced traders. In this article, you will learn about its indicators, tools, the best time for scalper and how to do it.
Here's a quick look at what you'll read
Scalping is an extremely short-term strategy used by day traders. Focus on chart analysing, price action, and technical and fundamental analysis.
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.
A forex scalper encounters various trading opportunities based on key economic factors such as supply and demand, trade status, terms of trade, interest rates, inflation rates, economic growth, etc.
- Moving averages for scalping forex
- Forex relative strength index (RSI) Scalping
- Moving average convergence divergence (MACD)
- Envelopes,
- Bollinger Bands,
- Fibonacci retracements
A 1-minute time frame is considered best for the scalper, and the first half of the New York session is considered the best time to scalp.
Have a look at the detailed step-by-step procedures of trading in cryptocurrency below.
What is scalping?
Scalping is an extremely short-term strategy used by day traders involved in fast trading environments with a laser focus on chart analysing. It is used for trading in commodities, stocks, indices, forex and other financial markets.
Scalpers in forex focus on price action and technical analysis only and overlook fundamental analysis, even short-term trends within the forex markets, because they need more time to materialise fundamentals before a trade is completed. The merits and limitations of scalping differ from forex scalping to swing trading.
Attributes
- Scalping strategy in forex gear towards gaining from minor price fluctuations.
- In forex trading, scalping is usually utilised 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 ideal for 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.
Forex Scalping
Scalping in forex 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 daily 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 aim to create 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 simultaneously paired with one currency’s value represented in the other’s, it is called a currency pair. A currency pair can be a Major Currency Pair like EUR/USD or Minor Currency Pair like EUR/GBP or AUD/JPY, where the first shortened currency name is the base currency, and the latter is the quote currency.
Forex Scalping Example
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.
Forex scalpers consider the market volume and take advantage by executing such small trades multiple times within a trading day.
How does scalping work in forex?
The process of Forex scalping trading 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 and charting.
Charting & Indicators
As traders take advantage of small but tricky price fluctuations within small time frames, scalping in forex 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 scalping indicators include:
- Moving average convergence divergence (MACD)
- Envelopes,
- Bollinger Bands,
- Fibonacci retracements
Manual and Automated Scalping Strategies
Forex scalping strategies can be manual or based on an automated trading system. A manual system involves hours of sitting in front of computer screens to identify signals and deciphers whether to make a buy or sell trade.
In contrast, automated system trading involves setting specific entry and exit points rules. A scalping bot will make trades based on a range of set indicators and rules when to scan the market. Thus, combining trading strategies, technical analysis, and indicators is valuable to identify profit potential trading opportunities.
Risks Involved in Scalping
Short-term trading, like the scalping forex strategy, is considered more speculative than a traditional buy-and-hold approach for forex trading. A scalper needs to manage and control risks involved in leverage, currency 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. Forex traders require a platform offering advanced order types with guaranteed stop losses, partial closure, and tight spreads at competitive forex costs to take advantage of scalping.
Best time to scalp forex
Forex Scalpers generally trade within the time frame of 15 minutes. However, a 1-minute time frame is considered best for them. The first half of the New York session is considered the best time to scalp.
Bottom Line
Scalping is a method that involves a high risk and high profit. However, for using scalping in forex, experience and Knowledge is a must. This strategy requires certain, right trading psychology advanced skills, patience and discipline.
So a trader must possess these skills to take advantage of this method and earn lots of money. Beginners or traders with less market knowledge should refrain from using this method.