Forex scalping is a trading strategy that is designed to capitalise on tiny price movements of currency pairs that are traded on the foreign exchange markets. Scalping differs from other trading styles as positions are held for very short periods of time, generally only a matter of minutes or possibly just seconds!
Forex scalping is fast paced and volatile and implementing this form of trading requires a well written trading plan that sets out pre-defined rules for entering and exiting trades. This allows a trader to easily identify a trading opportunity and act quickly.
This article will teach you how to become a Forex scalper.
In This Article:
- The Strategy Of A Forex Scalper
- How Do Forex Scalpers Make Gains
- Managing Risk
- Opening A Broker Account
- Summary
The Strategy Of A Forex Scalper
Before we begin discussing the various key elements on how to become a Forex scalper, we must first understand the basic principles of a scalping strategy.
A Forex scalping trading strategy is the method of identifying trading opportunities on the smallest time frames and holding positions for very short periods of time prior to closing. The trading style is best suited to traders that are able to dedicate sufficient time to consistently monitor currency markets and quickly identify optimal entry and exit points.
Forex scalping requires the implementation of a considered and well written trading strategy that defines which market conditions must be met prior to entering a trade. This assists with being able to react quickly and enter a trading position at the optimal entry point. The individual trader must trade with discipline to ensure that the scalping strategy is implemented correctly.
The criteria set out in the trading strategy will depend entirely on the individual. Some traders will rely solely on technical analysis and patiently wait until the trading signals are met, reacting immediately on the signals provided by their chosen technical indicators. Others will depend more heavily on fundamental analysis and trade the volatility that follows an important economic announcement.
Whichever method of identifying a trading opportunity is used, the common element is that trades are held for a short amount of time, taking advantage of gains that can be as small as a few pips. Once the required targets have been reached, the trade is closed with no thought of holding onto the position. The desired outcome is to accumulate a large number of small gains.
» For more information on what should be included within a strategy, see our guide writing the best Forex scalping strategy.
How Do Forex Scalpers Make Gains
The basic objective of Forex scalping is to accumulate several small pip gains over the period of a single trading period, generally a trading session i.e. New York or London. For this to be achievable, the Forex scalper must consider the following key elements:
Market Volatility
Learning how to become a Forex scalper requires and understanding of the importance of market volatility. Forex scalping strategies are based around the requirement to enter and exit several trades a day, possibly even hundreds, each trade making very small gains. High volatility is required in the markets as this ensures that prices are constantly fluctuating, creating entry and exit points.
A proven method of predicting market volatility is to review the economic calendar on a daily basis. A quick 5 minute review each morning will identify which currencies will be effected by economic announcements that are scheduled for the day.
Volatility can also be predicted using technical analysis. Using technical indicators like Bollinger Bands can help anticipate upcoming volatility, although this can take some time to materialise.
Levels Of Leverage
Most beginners learning how to become a Forex scalper will find that trading with leverage is a necessity. Scalping focuses on accumulating small gains, generally in the region of 10-20 pips, to make this worthwhile, the size of a position traded will need to be much larger than if a longer term trading strategy was to be implemented.
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, this is where the brokers assist and offer 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.
Liquidity
Liquidity is a key component for a Forex scalper as liquidity determines the level of spread. The broker spread 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 as these are the most liquid markets. 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.
Managing Risk
To become a Forex scalper a detailed understanding of risk, and more importantly how to manage it, needs to be learned. As gains from scalp trading are so small, letting a losing trade run in the hope that it will revert can mean that previous accumulated gains can potentially be wiped out with one trade. Emotion needs to be eradicated from Forex trading, accepting that losses are inevitable and should be treated as a form of trading expense means that they can managed by means of stop loss orders.
To create a risk management strategy, consideration should be given to your chosen level of risk to reward.
A risk reward ratio is essentially a calculation that determines how many trades are required to be successful to break even. This will be tailored to suit individual traders risk appetite, so do not try to compare yourself to anybody else, it needs to be set at a level at which you are comfortable.
A generally accepted level of risk reward is 1:2 i.e., for every £1 invested, £2 is expected in return. This means that only one in three trades needs to be successful to maintain breakeven trading. Using a 1:2 risk reward ratio allows a trader to calculate a stop loss order. Let's assume that a trade is expected to make a gain of 20pips, the stop loss order will be placed at 10pips, automatically closing the trade at this point and protecting the overall trading strategy.
» For more information see our managing risk hub for a range of detailed guides.
Opening A Broker Account
Before your can become a Forex scalper, you will first need to register with an online broker. There are range of sophisticated platforms available, but it is worth spending some time researching the following key points to ensure the broker facilitates the requirements of your Forex scalping strategy:
- Levels of leverage available
- Margin requirements
- Broker spread sizes
- Range of currency pairs
» We have more information on these matters in our guide what you need to know about Forex scalping.
Summary
If you are asking the question how to become a Forex scalper, you are researching how to trade currency markets within the most volatile of time frames. Forex scalping is fast and furious, making it attractive to those looking for an exciting trading experience. However, it is not for the faint hearted. Trading opportunities need to be analysed and executed quickly once optimal price points have been identified. Having a detailed trading strategy in place will assist with spotting trading opportunities and determining entry and exit points.
