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Forex scalping is a popular and fast paced form of trading currency markets, focusing on taking several positions a day and holding for very short periods of time, usually a few minutes. The aim of a Forex scalping strategy is to capitalise on periods of high trading volatility and capturing small pips gains.
This form of trading is appealing to many traders due to the scale of the gains that can be made over short periods. However, to make viable gains there are additional risks that need to be considered, this beginners guide to Forex scalping will highlight the various complications presented to potential scalp traders and discuss the implications.
In This Article:
- Am I Suited To Forex Scalping
- Importance Of Market Liquidity
- Necessity Of Leverage
- Watch The Spread
- Summary
Am I Suited To Forex Scalping
Adopting a Forex scalping strategy may initially seem to be the most attractive option for beginner traders, however this form of trading is not suited to everybody and the following considerations should be taken into account prior to commencing trading.
Time Commitment
Forex scalping requires dedication. The strategy requires placing several, perhaps even hundreds of trads per day for it to prove viable. For the necessary trading levels to be achieved, a trader will be required to constantly search for trading opportunities across several currency pairs. If the trader is restricted by time constraints and close attention to various markets is not possible, many trading opportunities will be missed.
Before commencing trading it would be advisable to give serious consideration to how much time you are realistically able to dedicate to trading. Follow this up by opening a demo trading account with an online broker and test your dedication in real time to fully appreciate what is required.
Ability To Act Quickly
Forex markets move quickly and this is even more true when scalping. A scalping strategy works most effectively during periods of high volatility in which price action moves extremely quickly. Being able to assess and execute trades is essential and you will need to be:
- Fast thinking,
- Able complete market analysis under pressure,
- Capable of executing trades quickly,
- Competent at assessing risk.
As scalping strategies generally look to achieve gains of around 10-20pips, being hesitant or not proficient at quick decision making, will run the risk of the trading opportunity being lost as prices may have moved prior to the trade being placed.
Patience & Discipline
Forex scalping strategies require several trades to be placed during a trading session, therefore there is a pressure on the trader to constantly search for trading opportunities. That said, opportunities are not always present and it is essential that patience is demonstrated waiting for an opportunity that meets the necessary trading signals set out within the trading strategy.
It is very tempting to enter a trade that almost meets the criteria so that you are in a trading position, discipline is required to ensure this does occur.
» For more information see our guide why writing a trading strategy is important.
Importance Of Market Liquidity
The definition of liquidity when discussing Forex markets is that liquidity is related to the amount of pending orders that exist on the market at a certain time. This is an important consider to Forex scalpers as trade entry and exit points need to be actioned immediately. When you hit your buy or sell button, you want your order to be executed at that exact price. The same happens when you want to close your trade. If your trade close is not executed at the price that you want, one small movement of the price may make your trade close to a loss.
That’s why liquidity is an important factor to consider for beginners looking at a Forex scalping strategy. The more liquid the market being traded, the more accurate the open and close orders will be. When implementing scalping strategy, only the major currency pairs should be traded as they provide the most liquidity.
Necessity Of Leverage
Leverage for most beginner Forex scalpers is a key component to their strategy and an essential trading tool. As Forex scalping is centred around capitalising on very small fluctuations in price, generally in the region of 10-20 pips, the size of a position traded has to be much larger than would be needed with another strategy to make the trade worthwhile.
Price fluctuations are measured in pips, the smallest measurable price movement with a value of £0.0001. Due to the tiny value of the price movements, it is necessary to trade in lots, a standard lot is 100,000 units, a mini lot is 10,000 and micro being 1,000 units.
Obviously, most traders will not have the capital available to purchase 100,000 units of EUR, in fact most speculative traders begin with an account value of £10,000. This is where the brokers assist and offer their traders the opportunity to leverage their forex positions.
All online Forex brokers will offer leverage, levels will vary, but some will allow a position to be taken up to 100x the value of their account. If a trader initially deposits £1,000 to open an account, leverage of 100x would allow a position of 100,000 units.
The purpose of forex leverage trading is to create a trading position that is worth taking. Trading at higher levels increases pip value in accordance with the leveraged trade size i.e., 100,000 units x £0.0001 = £10.
Trading with leverage brings a trader the opportunity to maximise potential gains whilst using a comparatively small initial investment. This sounds like a fantastic trading opportunity, but trading with leverage does come with some complications.
» For more information visit our leverage trading hub for a wide variety of guides on best practice and the risks involved.
Watch The Spread
The final material consideration for that we will discuss in this beginner guide to Forex scalping is the importance of trading with a tight spread.
Understanding spread when utilising a scalping strategy in Forex trading is essential, as it is the primary cost of placing a trade. Essentially, spread is the broker fee, charged in the form of commission for placing a trade on the traders behalf. Online brokers charge a spread for every single trade placed, whether it is a tight or wide spread will be determined by market conditions at the point of placing the trade.
Forex scalping should only ever be actioned on the major currency pairs. Liquidity is a key element when brokers calculate the spread and trading only within high liquidity markets will minimise the risk of being caught out by a large spread.
Assume by means of example that a trade has been taken that has the potential to achieve a gain of 20pips. If the broker spread is 4pips, 20% of the potential gain from the trade has been lost to the spread. Major currency pairs will generally be subject to a broker spread of 1-2%, therefore increasing the opportunity for larger gains.
» For more information see our guide what is spread in Forex trading.
Summary
Forex scalping is undoubtedly a popular form of trading but it essential that new traders have a full understanding of all of the topics mentioned within this beginner guide to Forex scalping. There is more to consider in terms of which strategy will be adopted, trading signals to incorporate and consideration to useful indicators, but an understanding to the key components listed above will give a trader a firm platform from which to build upon.
