One of the first ambitions that new traders often have is to learn Forex scalping. A scalping strategy focuses on placing several trades a day, entering positions and existing shortly after following a small gain. The aim of a Forex scalping strategy is to accumulate many small gains during a trading session, and this is often popular for traders seeking a fast paced and exciting trading experience.
Scalp trading is not unique to the currency markets but is perhaps best suited to them. Scalping requires high levels of volatility so that prices fluctuate in short periods of time, liquid markets are also necessary so that entry and exit points can be actioned immediately, and the Forex markets have both of these main criteria.
In This Article:
- What Is Forex Scalping
- Opening A Broker Account
- When To Trade Forex Markets
- Scalping With Technical Analysis
- Further Considerations
- Summary
What Is Forex Scalping
Forex scalping is a trading strategy that identifies trading opportunities on the smallest time frames and involves holding open positions for very short periods of time. A scalping 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 a well written trading strategy that dictates 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 an optimal 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 a technical indicator providing the required signal. Others will depend more heavily on fundamental analysis and trade the volatility that follows an 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.
Opening A Broker Account
Before can start trading with your scalping strategy, an online broker account will need to be opened, the process itself of opening an account is very similar to opening an online bank account. A simple account opening form will need to be completed that will require some personal information and details of employment, once complete, a deposit will need to be made and you can commence.
What is important though is to make sure the chosen broker offers facilities that suit your Forex scalping strategy. As scalping requires precision and taking full advantage of a trading opportunity, the following factors should be considered:
It is recommended that a demo account is first opened. Most reputable brokers will offer a demo account pre-funded with demo funds. This is a great opportunity to familiarise yourself with the broker platform prior to opening a full account.
Trading using a demo account will also provide the perfect opportunity to learn Forex scalping and how to implement your chosen strategy.
When To Trade
When learning Forex scalping there are two key factors that must be taken into account, without them a scalping strategy will be extremely difficult to trade:
High Volatility
Forex scalping is based around the requirement to enter and exit several trades a day, 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. There are several trading sessions over a single day and it is imperative that you trade the currencies that are most traded within these sessions. The periods of highest volatility are when trading sessions overlap, for example New York & London sessions are both open between 1pm - 4pm and Tokyo and Sydney are both open between 12am - 7pm.
If a scalping strategy is focusing on trading either the USD or GBP, it is essential that the trader is able to operate within these trading sessions.
» For more on market hours and trading sessions see our guide Forex market hours and best times to trade.
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 consideration to Forex scalpers as trade entry and exit points need to be actioned immediately. When the buy or sell button is hit, the order needs to be executed at that exact price. The same happens when you want to close your trade. If a trade close is not executed at the price required, one small movement of the price may turn a trade close to a loss.
That’s why liquidity is an important factor to consider for beginners looking to learn Forex scalping strategy. The more liquid the market being traded, the more accurate the open and close orders will be. When implementing a scalping strategy, only the major currency pairs should be traded as they provide the most liquidity.
Scalping With Technical Analysis
Online Forex broker platforms will offer their traders a range of technical tools that assist with reading currency pairs and predicting future movement. There are three very simple but powerful indicators that should be understood by anybody wanting to learn Forex scalping:
Relative Strength Index
The Relative Strength Index (RSI) is an oscillator that can provide extremely useful information on the momentum of a price movement. It is a simple line graph that is displayed generally at the bottom of a technical chart so that it can be cross referenced to current price activity. The RSI measures price gains and losses and provides readings from 1 - 100. Anything above 70 is considered as overbought and under 30 is oversold.
» For more on this see our guide trading using the Relative Strength Indicator.
Bollinger Bands
The Bollinger Band indicator consists of three lines, the Simple Moving Average (SMA) that is in the centre of the indicator and two positive and negative deviations, represented by upper and lower bands respectively.
The upper and lower bands expand and contract as market volatility increases and decreases, giving the trader a better understanding of the momentum behind current price action.
» For more on scalping with Bollinger Bands see our guide using Bollinger Bands in a scalping strategy.
Moving Averages
The purpose of using moving average indicators in a scalping strategy is to identify optimal entry points. To do this we use two indicators, a 200SMA a 20EMA. The purpose of the SMA is to plot the longer-term trend line and to trade only when price action is in line with the underlying trend. For instance, if the long-term trend is bullish, a scalp trader will be looking to place a trade as sentiment turns bullish, looking to capture short term bullish price momentum.
» To learn Forex scalping with Moving Averages see our guide to scalping with a 3 EMA strategy.
Further Considerations
Having discussed what to look for in a broker, best times to trade and which indicators are best for those looking to learn Forex scalping, we must now consider two other factors that are fundamental:
High Levels Of Leverage
Forex scalping focuses on capitalising on very small fluctuations in price, to make the trade worthwhile, the size of the position taken has to be much larger than would otherwise be needed if another trading style was adopted. Traders will likely be required to leverage their initial investment to achieve this, which will require a larger deposit.
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, therefore increasing potential gains that would arise from small pip movements.
» For more information see our beginners guide to leverage.
Tights Spreads Are Essential
Understanding spread is 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 with a view of making a gain of 10pips. If the broker spread is 4pips, 40% of the potential gain from the trade has been lost to the spread. Look to scalp markets that offer a spread in the region of 1-2%
Summary
Beginner traders looking to learn Forex scalping will be required to give a lot of consideration to several factors when drafting their trading plan. We have written this guide to highlight the complexities that can cause a well considered strategy to fail. A good understanding of the principles of scalping is not enough, as additional restrictions placed by online brokers may mean that it simply cannot be actioned due to restrictions on funding, high levels of leverage creating too much risk, lack of liquidity in markets or spreads absorbing large amounts of profit.
