Day trading is the most popular trading approach in Forex, and one of the most popular day trading styles is scalping. Trading fx with scalping strategy requires constant attention from the trader, as when scalping, traders usually keep their positions open for just a few minutes and aim to make profits on price changes that occurred during very short periods. This is a both complex and simple trading style that can be easily understood, however hard to master.
Scalping involves placing multiple orders within a day, which is why for scalpers, good trading strategies that help manage their risks are critical. Traders need tight spreads, good liquidity and volatility to scalp trade. Let’s dive deep and find about scalping strategy Forex pairs.
What is Scalping in Forex
Forex Scalping is a style of Day Trading, where Forex traders open and close multiple positions throughout the day. When opening a position, scalpers typically keep them open for a few minutes before closing it and taking out small profits made, which are often in the range of 5 to 20 pips. These small profits then add up as traders open and close more positions throughout the day, and at the end of the trading session, they are left with respectable profits if everything went smoothly.
When Scalping in Forex, traders utilizes leverage in order to increase the size of their trades. Leverage gives traders possibilities to make respectable profits from very small market movements, which without leverage, would be so small that it is hardly worth trading with unless you are going in with a lot of money.
While Scalping, traders can trade manually or automate their trading system. When trading automatically, scalpers need to keep an eye on the market in order to spot upcoming trends and price movements, which then can be used to make profits. On the other hand, considering that when scalping traders will need to use different indicators and strategies, it is possible to automate this process. Traders can set up trading bots and Expert Advisors and program them to follow a very specific strategy, but there are certain risks associated with using these automated tools. When Scalping profits from each trade are relatively small, but if traders make even one unsuccessful trade, without a good stop-loss system in place they will suffer big losses. Therefore, using automated trading tools is risky as these bots are not perfect and one slip-up is enough to cause the collapse of our entire trading system.
Another reason as to why it is best to scalp manually is that all kinds of news from all around the world can affect the Forex market, and this is the best opportunity for Scalpers to make profits. News regarding interest rates, inflation, presidential elections, and other geopolitical news can have a big impact on the Forex market for small periods of time. During these times, Scalpers usually flood the market in order to make profits from the volatility caused by this news.
How to scalp in Forex market
Now that we know what Scalping is, let’s take a look at how we can scalp the Forex market and what we will need to do so.
The first important thing every trader should give attention to is the type of account they are using. As we mentioned before, Scalpers don’t make big profits from each trade, and the overall profit they make throughout the day is what matters in the end. Because of this, it is critical that Scalpers are trading with an account that has small spreads and low commissions. This matters because if spreads are high, profits will get hurt. Scalpers make a lot of trades daily. Even one pip spread difference can make or break a trader.
Once our account is ready with funds deposited, it is time to move to the most essential part, which is setting up a scalping strategy/system. When doing so, the first step is to decide which currency pair we are going to trade with. It is generally advised to trade with currency pairs that have volatility to a moderate level. The reason for this is that if we trade with low-volatility pairs, the market will take way too long to reach our desired price point, and we might not be able to close the position for quite a while. While, if we trade with currency pairs with very high volatility, the risks of making losses increase dramatically. The best currency pairs for scalp trading are major pairs due to their high liquidity and tight spreads.
There are many Forex indicators that look at different market factors and based on the information received and some past historical data, they provide us with signals as to what is going on and going to happen in the market. Because of this, it is important to select the right indicator and base your whole scalping strategy around these indicators. These indicators can be of all sorts, but the most popular and useful indicators are known to be momentum-based and trend-following indicators. Below, we will list and go over briefly some of the best indicators to use when scalping. For a full list, you can read our guide to the best indicators for Scalping Forex.
Moving Averages are probably the most widely used indicators in Forex scalping. These are indicators that look at an average price of an asset across certain periods, and based on the movements of these indicators, traders make decisions about when to enter and exit the market. There are two types of Moving Averages, and they are Simple Moving Average(SMA), which puts similar weight on both recent and past prices, and Exponential Moving Average (EMA), which puts more weight on recent price movements.
When using this indicator, the most simple strategy to follow is the crossover strategy. If the short-term MA crosses and goes above the long-term MA, it means we have an uptrend. While if it happens the other way around, it means we have a bearish market. And based on this information, scalpers can enter and exit the market.
Another very popular indicator for Forex trading is the Moving Average Convergence/Divergence or MACD for short. This is a trend following momentum indicator and can be considered an upgraded version of the Moving Average. MACD is calculated by subtracting 26-period EMA from 12-period EMA, and the resulting number is our MACD. It is then plotted below the chart with 9-period EMA as a signal line.
When using the MACD indicator, the most simple strategy is to look for crossovers between MACD and 9-period EMA. If MACD goes above the signal line, it means a bullish run is happening, while if it falls below the signal line, we should expect bearish market conditions.
The Relative Strength Index (RSI) and scalping example
The RSI indicator is widely used among scalpers. Typically, scalpers incorporate RSI on shorter time frames.
In this Forex scalping strategy example, you can see that the currency is traded in a range. The RSI gave us entry signals. When RSI crosses 70% level, we have a signal of an upcoming downward move, and we can short. And When the RSI is below 30%, we can go long. Stop losses can be placed depending on the setup. In general, it’s recommended to have smaller stop loss than potential for the profit. If risk to reward ratio is higher than 1 risk and 1 reward, trade is not worth opening.
Advantages and Risks of Scalping in Forex
Well, every trading style or strategy has its advantages and disadvantages, there is no running away from that fact. When it comes to scalping there are quite a few of them to consider and below we will go over some of the most important factors of Scalping in Forex.
Every scalping strategy, Foreign Exchange traders use, offers the opportunity to make a large amount of trades and therefore spread out the risks on many trades. For this very reason, having a proper risk management is highly essential. A single scalping trade size should never be too significant.
Scalping can give many trading opportunities to traders that are looking for trading strategies that can keep them actively involved in the process.
The number one enemy of Scalper is the spreads. As we mentioned earlier, Scalpers make a series of small profits that in the end add up and result in respectable profits. But if spreads are high, these small profits can become even smaller or could be wiped out completely. There are also risks such as slippage, delay in execution, and other technical problems. When Scalping, it is crucial to have everything operational and running smoothly.
The human factor is another risk associated with scalping. When Scalping, we will open and close a lot of positions, and keeping an eye on these orders can tire the trader out and put a huge stress on them. When trading in these conditions, the possibility of making a mistake rises and traders might end up opening an unfavorable position.
FAQs on How To Scalp Forex
Is Scalping a good Forex strategy?
Scalping is a very popular Forex strategy for a reason. It is a perfect trading strategy for active traders. On the other hand, it can lead to overtrading as traders need to control their emotions when scalp trading regularly. Scalping is for traders that can spend a lot of time in front of their PC screens looking for trading opportunities and executing orders.
Which timeframe is best for Scalping strategy?
It depends on the indicators we are using and the currency pairs we are trading with, but in general, 1-5-minute timeframe is considered to be the best timeframe for Scalping the Forex market.
Which pair is best for Scalping strategy?
There are a few good currency pairs for scalping. When choosing the best pairs it is important that they have moderate volatility and the following currency pairs are one of the best pairs for Scalping: EUR/USD, GBP/USD, and USD/JPY. These pairs are also one of the most liquid. Liquidity is vital for scalpers, as they get the best possible spreads during high liquidity.