Forex scalping is a trading style generally adopted by traders that are looking for a fast paced form of trading. Looking to capitalise on the smallest fluctuations in prices of currencies, a scalping strategy requires committing a lot of time to trading as traders will constantly be searching out trading opportunities across many markets.
This form of trading is appealing to many traders due to the scale of gains that can be made over short periods of time. However, to make scalping a viable strategy, there are several considerations that need to be incorporated within a trading strategy. This guide has been written to make sure that as a new scalp trader, we have provided you with what you need to know about Forex scalping prior to starting.
In This Article:
- How Forex Scalping Works
- Forms Of Forex Scalping Strategies
- What You Need To Know To Scalp Forex
- Time Commitment
- Choosing Your Forex Broker
- Trading With Leverage
- Protect Your Margin
- Trade With Tight Spreads
- Summary
How Forex Scalping Works
Forex scalping is similar to day trading in that trades are open and closed within the same trading session. The main difference between scalping and day trading, is a day trading strategy will generally involve trading on 15-minute or 30-minute time frames and positions being held for several hours.
Forex scalping is different, it trades on the smallest of time-frames, usually 1-minute or 5-minute time frames and positions are held for a matter of minutes. The aim of scalping is to enter and exit the trade as soon as anticipated gains have been made, never are trades held onto and allowed to run. The purpose of this strategy is to accumulate large numbers of small gains over the course of the trading session.
Scalping is most effective during periods of high trading volume and market volatility. This allows trades to capture potential gains in the region of 5 to 20 pips in very short periods of time and minimising exposure to being caught within a sideways price move.
Forms Of Forex Scalping Strategies
Forex scalping strategies can be broken down into two main forms:
Fundamental Analysis
Trading Forex on the basis of fundamental analysis based around acting in response to important economic announcements. There are a range of economic calendars available to traders so that these can be tracked easily and most will rank the announcements in expectation of their effect on the currency markets. Trading what are deemed to be high impact announcements means that there will be high volume and volatility within in the market to ensure a quick and entry and exit.
There are various strategies to trading using fundamental analysis and they mainly on trading either the announcement or the correction.
» For more on price corrections and retracements see our guide to trading a Fibonacci retracement.
Technical Analysis
The second method scalp trading centres around technical analysis. This method focuses on using a range of technical indicators to provide trading signals for both entry and exit points.
Whichever approach to trading is adopted there are some key factors that will effect ability to scalp Forex markets if they are not fully understood, we will discuss these below.
What You Need To Know To Scalp Forex
Forex scalping is very popular to new traders who are looking for a quick access to market. A common mistake that is made is that a couple of hours trading day can provide to be a viable strategy, assuming that oversized trades are taken utilising high levels of leverage. This is destined to be a very short lived approach and we have written this guide to what you need to know about Forex scalping so that mistakes made by other are not repeated!
Time Commitment
Forex scalping requires dedication. The strategy requires placing several, perhaps even hundreds of trades 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 can realistically be dedicated 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.
Choosing Your Forex Broker
Before trading 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:
- Levels of leverage available
- Margin requirements
- Broker spread sizes
- Range of currency pairs
We will discuss each of this below, but once satisfied that all of the above meet your needs, 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 opportunity to test your Forex scalping strategy. A well written trading plan may have already been drafted and you may feel confident, but scalping is fast paced and ultimately you will possibly not be well suited to it.
Trading With 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.
Protect Your Margin
The purpose of margin is for a broker to limit a trader's exposure to incurring unaffordable losses. Whilst margin is not a cost, it is a notional transaction that reduces available funds in accordance with sizes of trades placed. This has the effect of limiting how many positions can be opened without depositing further funds into an account. Lets' say for example that a trader deposits £10,000 into a trading account and takes a position that requires a margin of £2,500. Whilst a cost has not been incurred by the trader, available funds have been reduced to £7,500.
When drafting a Forex trading strategy, consideration should be given to the impact of margin. In a Forex scalping strategy it is likely that a trader may be planning on taking several open positions and utilising high leverage to capitalise on tiny price fluctuations, it will be important to make sure that a broker's margin requirements allow for the number of open trades required.
» For more on margin see our guide to understanding Forex margin trading.
Trade With Tight Spreads
Understanding spread when adopting a Forex scalping strategy 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
We have written this guide to what you need to know about Forex scalping 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.
