A Forex scalper is a trader that specialises in trading foreign exchange markets on the smallest of time frames. The objective of Forex scalp trading is to capitalise on the tiny fluctuations in price movement, holding open positions for a matter of minutes and often just seconds.
A Forex scalper is a high frequency trader, placing several trades a day, possibly hundreds with the ambition of accumulating lots of small gains. This article discusses the characteristics of a Forex scalper.
In This Article:
- What Is A Forex Scalpers Strategy
- Key Elements Of A Scalping Strategy
- Character Of A Forex Scalper
- Scalping Is Not For Everybody
- Summary
What Is A Forex Scalpers Strategy
Scalping is a Forex trading strategy that aims to achieve potential gains from the smallest fluctuations in a change of a currency's value. Position are held for short periods of time and trades are quickly closed once a pip gain in the region of 10-20 pips has been achieved.
All forms of trading require discipline, but because the number of trades is so large, and the gains from each individual trade so small, a scalper must have a rigid adherence to their trading system, avoiding one large loss that could wipe out dozens of successful trades.
There is a wide variety of Forex scalping strategies that have various nuances, tailored to the individual, but all Forex Scalper strategies will give consideration to the following key elements.
Key Elements Of A Scalping Strategy
Risk To Reward
A risk reward ratio is essentially a calculation that determines how many trades are required to break even. This will be bespoke to individual traders and needs to be set at a comfortable level.
A generally accepted level of risk reward is 1:2 i.e., for every £1 invested, £2 is expected in return. This means is that only one in three trades needs to be successful to maintain breakeven.
By way of an example let us say that 3 trades are placed with a risk of £50 on each, two fail and one is successful. 2 x £50 losses = £100. 1 x £100 win = £100.
Of course, if a trader is more risk adverse, they may look for a greater ration 1:3 or 1:5.
Having a pre-determined risk reward ratio that is adhered allows a trader to accept losses. So long as the ratio is maintained, breakeven will be sustained as a minimum.
» For more on risk reward ratio's see our guide risk reward ratio's when Forex trading.
Leverage
A Forex scalper will generally trade with high levels of leverage, this allows larger positions to be taken. 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.
Market Analysis
The basis for which Forex traders form opinions on predicted price movement falls into two categories, fundamental or technical analysis. There is a long-term debate between professional traders about which method of analysis provides the more reliable information for creating the best Forex scalping strategies, both have there strengths and weaknesses and ultimately it will depend entirely on the individual.
Character Of A Forex Scalper
Having a considered and well written trading strategy is essential for a Forex scalper, however it is not all that is needed! There are several personal attributes required to stand any chance of performing as a Forex scalper:
Dedication
Becoming a Forex scalper requires dedication. The scalping 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 is realistically available to dedicate to trading.
Quick Decision Making
Forex markets move quickly and this is even more true when scalp trading. 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.
Objective & Composed
The nature of Forex scalping requires market conditions to be volatile. During these periods of volatility prices will rise and fall sharply and it is essential that composure is maintained. A Forex scalper will take gains once they have achieved the goals set out within the trading strategy, avoiding the temptation to hold on to positions and letting them run.
It is important to remember that no trader wins every trade! Incurring losses is an inevitability of trading and it is essential to treat a loss objectively and view it for what it is, a simple cost of trading.
A common problem for traders is accepting losses. Instead of understating that losses have to be managed, simply refuse to accept them at all. This can lead to emotional trading and holding onto to losing positions too long, allowing the losses to scale out of control. It is always better to accept a small manageable loss and trade another day, than to put your capital at an unacceptable level of risk. This is particularly true for a Forex scalper as a big losing trade could wipe out all the potential gains previously accumulated.
Scalping Is Not For Everybody
Not everybody has the characteristics of a Forex scalper! New traders seek to become a scalp trader due to the attractiveness of its fast paced nature and soon realise that they do not have the temperament. This can often result in losing discipline with trades being entered into prematurely or holding onto positions when they should have cut their losses. Intense concentration searching for trading opportunities can result in boredom and trades being entered into "for the fun of it".
It is strongly recommended that prior to trading for real, an online demo account with a broker is first trialled. This will provide the opportunity to trade under realistic conditions and test whether you have the characteristics of a Forex scalper.
Summary
An ambition that new traders often have is to become a Forex scalper, enticed by the fast paced trading style that it is. However, scalp trading is not easy and much more is required than just a considered and well written trading strategy. Scalp traders will be required to be dedicated, patient, disciplined, objective and composed. It is highly recommended that a demo trading account is first opened to test whether you have the characteristics of a Forex scalper.
